Module 2: Cost Classification

Question 1

R________ ______ are future cash flows arising as a _______ consequence of making a _________.

Decisions should be based on ________ ___________ _____ _____.

Answer 1

Relevant costs; direct; decision;
future incremental cash flows;

Question 2

Decision making should be based on _________ costs, which are:
- F________ costs: A decision is about the _________ and it cannot alter what has been done already.
- C_____ _____: Only _____ _____ information is required. This means that costs or charges which do not reflect additional cash spending, such as ___________ or arbitrarily ___________ _____, should be ignored for the purposes of decision making.
- I_________ _____: Additional costs incurred due to a particular ________ or __________ course of action.

Answer 2

relevant;
future; future;
cash flows; cash flow;
depreciation; apportioned costs;
incremental costs; decision; alternative;

Question 3

A_________ c____ are costs which would not be incurred if the activity to which they relate did ___ ______.

Answer 3

Avoidable costs; not exist;

Question 4

• One situation where it is necessary to identify __________ costs, is when deciding whether to __________ a product.
• The only _____ which would be _______ are the _________ costs which are usually the variable costs and some specific costs.
• Costs which would be incurred whether or not the product is discontinued or not are ___________ costs.

Answer 4

avoidable; discontinue;
costs; saved; avoidable;
unavoidable;

Question 5

Relevant costs include __________ costs and ____________ costs.

• ___________ cost is the difference in total cost between alternatives.
• An ____________ cost is the value of the benefit sacrificed when one course of action is chosen in preference to an alternative.
• For example, if decision option A costs $300 and decision option B costs $360, the differential cost is $___

Answer 5

differential; opportunity;
differential;
opportunity;
$60;

Question 6

• C__________ costs are items of expenditure which can be _______ _________ by a given manager within a given _____ _____.
• As a general rule, ___________ ______ _____ such as rental costs arising from the possession of plant, equipment and building, are largely _____________ in the short term because they have been committed by _____-______ decisions.

Answer 6

Controllable;
directly influenced;
committed fixed costs;
uncontrollable;
long-term;

Question 7

• D__________ f_____ c_____, such as advertising and development costs can be thought of as being ___________ because they are incurred as a result of decisions made by ___________ and can be _________ or _________ at fairly short notice.

Answer 7

• Discretionary fixed costs;
• Controllable;
• management; increased; decreased;

Question 8

A _____ _____ is a past cost which is not directly relevant in decision making.

The principle underlying _________ ________ is that management decisions can only affect the _______.

Answer 8

sunk cost;
decision making; future;

Question 9

• V________ _____ are costs that are ________ ___ ____ but can change as ___________ or _________ volume changes, will be relevant costs.

Answer 9

variable costs; constant per unit;
production; service;

Question 10

• E________ ______ ______, which are costs that are constant but __________ per unit output as activity increases, will be incurred in any event, regardless of the decision, and so are ___-________.

Answer 10

Existing fixed costs;
decrease;
non-relevant;

Question 11

Example: A company has some units of raw material in inventory. They have been paid for already, and originally cost $2000. They are now obsolete and are no longer used in regular production, and they have no scrap value. However, they could be used in a special job which the company is trying to decide whether to undertake. The special job is a “one-off” customer order, and would use up all these materials in inventory.

• In deciding whether the job should be undertaken, the relevant cost of the materials to the special job is ___. Their original cost of $2000 is a ____ ____, and should be ________ in the decision.
• However, if the materials did have a scrap value of, say, $300, then their relevant cost to the job would be the _____________ _____ of being unable to sell them for scrap ($___)

Answer 11

nil; sunk cost; ignored;
opportunity cost; $300;

Question 12

D______ ____________ fixed costs are those costs which, although ______ within a relevant range of activity levels are relevant to a decision for either of the following reasons:

• They could _________ if certain extra _________ were undertaken. Eg. it may be necessary to ______ an extra __________ if a particular order is __________. The extra ________ would be an __________ ______ ____.
• The would ________ or be ___________ entirely if a decision were taken either to reduce the _______ of __________ or _____ _____ entirely.

Answer 12

Directly attributable; fixed;

increase; activities; employ; supervisor; accepted; salary; attributable fixed cost;

decrease; eliminated; scale; operations; shut down;

Question 13

A_________ __________ is a _________ accounting cost and hence should be ignored for ________-________ purposes.

Only _________ __________ arising as a result of the decision are ________.

Answer 13

Absorbed overhead; notional; decision-making;

incremental overheads; relevant;

Question 14

G________ f_____ o_________ are those f_____ o_________ which will be unaffected by decisions to _________ or __________ the scale of operations.

Unless there is an ___________ element, g________ f_______ o_________ are not a relevant cost.

Answer 14

general fixed overheads; fixed overheads; increase; decrease;

incremental; general fixed overheads;

Question 15

If additional materials need to be acquired for a job/contract, the relevant cost of the materials is their _______ _________ ______.

Answer 15

current purchase price;

Question 16

If the raw materials required are already in inventory then the relevant cost is generally their ______ ____________ _____, unless the materials would not be _________ once used.

In this case, the relevant cost of using them is the higher of the following:

• Their current ________ ______; or
• The value they would obtain if they were put to an ___________ ___.

If the materials have no resale value and no other possible use, then the relevant cost of using them for the opportunity under consideration would be ___.

Answer 16

current replacement cost; replaced;
resale value; alternative use;
nil;

Question 17

The relevant cost of an _____ represents the amount of ______ that a company would have to ________ if it were _________ of the asset in order to be no worse off than it already is.

We call this the _______ _____.

Answer 17

asset; money; receive; deprived;
deprival value;

Question 18

A machine cost $14k 10 years ago. The machine is expected to generate future revenues of $10k. Alternatively, the machine could be scrapped for $8000. An equivalent machine in the same condition would cost $9000 to buy now.

What is the deprival value of the machine?

Answer 18

1) Take the HIGHER of:
- NRV ($8000)
- Expected revenues ($10000)
= $10k

2) Take the LOWER of:
- $10k
- Replacement cost ($9k)
=$9k

therefore, deprival value = $9k

Question 19

C____ b_________ is the way in which _____ are affected by changes in the level of activity.

The basic principle of c____ b_________ is that as the level of ________ rises, _____ will usually rise.

Answer 19

cost behaviour; costs;
cost behaviour; activity; costs;

Question 20

• There are many factors which may influence _____.
• The major influence is _________ of ______, or the ______ of ________.

Answer 20

costs;
volume; output;
level; activity;

Question 21

An understanding of cost behaviour is useful for:
- ____ ______: The level of costs incurred will, in part, be a result of an organisation’s activities
- _________: knowledge of cost behaviour is essential for the tasks of __________, _________ ________ and _____________ control.

Answer 21

cost control;
budgeting; budgeting; decision making; management;

Question 22

For our purposes, the level of activity for measuring cost will generally be taken to be the ________ of ___________.

Answer 22

volume; production;

Question 23

• Costs may be classified into ______ costs and _________ costs.
• Many items of expenditure are part-_____ and part-________ and are so termed _____-______ or ____-________ (or ______ ) costs.

Answer 23

fixed; variable;
fixed; variable;
step-fixed; semi-variable; mixed

Question 24

_____ is a measure of the resources given up to achieve an objective

Answer 24

Cost;

Question 25

A ______ ____ is a cost which is incurred for a particular period of time and which, within certain activity levels, is unaffected by changes in levels of ________.

Answer 25

fixed cost; activity;

Question 26

A ________ ____ is a cost which varies with the level of activity. _________ _____ tend to be ________ per ____ but total ________ ____ will ________ or ________ with changes in ____________ or ________ volume.

Answer 26

variable cost; variable costs; constant; unit; variable costs; production; service;

Question 27

A ____-________ (or _____ ) cost is a cost that contains both a _____ cost and a ________ cost component.

Answer 27

semi-variable; mixed; fixed; variable;

Question 28

A ____-______ cost is a cost that is _____ for a certain range of activity but increases to a new fixed level once a critical level of activity is reached.

Answer 28

step-fixed; fixed;

Question 29

- D_____ m________ costs (costs of __________ consumed in the manufacturing process) are ________ costs because they rise as more units of a product are manufactured.

Answer 29

direct material; materials; variable;

Question 30

Sales commission is often a _____ percentage of sales turnover, and so is a __________ cost that varies with the level of sales.

Answer 30

fixed; variable;

Question 31

- Telephone call charges are likely to increase if the volume of business expands, but there is also a _____ element of line rental, and so they are a ____-_______ __________ cost.

Answer 31

fixed; semi-variable overhead;

Question 32

The rental cost of business premises is a constant amount, at least within a stated time period, and so it is a _____ cost.

Answer 32

fixed;

Question 33

- The salary paid to a factory supervisor might be considered a ____-_____ cost. - Eg. the factory may be able to produce up to 20 000 product units with one supervisor, but needs a second supervisor once this level of activity is exceeded.

Answer 33

step-fixed;

Question 34

- Fixed costs are a ______ ______, in that they relate to a _____ of _____. - As the _____ of _____ increases, so too will the _____ costs (sometimes referred to as ______ costs for this reason). - Fixed costs always have a ________ element.

Answer 34

period charge; span; time; span; time; fixed; period; variable;

Question 35

Examples of a _____ _____ would be: - The ____ of a ______ factory _________ (per month or per annum) - Straight-line __________ of a single _______ (per month or per annum)

Answer 35

fixed cost; rent; single; building; depreciation; machine;

Question 36

- A ____-_____ cost is a cost which is _____ in nature but only within a certain range of activity. - It is ______ for a certain range of activity but increases to a new _____ level once a ______ level of activity is _______.

Answer 36

step-fixed; fixed; fixed; fixed; certain; reached;

Question 37

Examples of a ____-______ cost: - Rent is a ____-_____ cost in situations where rental space requirements increase as output levels get higher. - Basic pay of employees is nowadays usually _____, but as output rises, more employees are required. - Royalties; for example, fees of $10 000 are payable if sales are below 5000 units. Fees increase to $15 000 if sales exceed this.

Answer 37

step-fixed; step-fixed; fixed; ________ _________ __________

Question 38

- A _________ cost is a cost which varies directly with the _______ of ______. - The ________ cost per ____ is the same amount for each unit produced but the total ________ _____ of production increases/decreases as the ________ of ______ (activity) increases/decreases.

Answer 38

variable; volume; output; variable; unit; variable cost; volume; output;

Question 39

- The most important ________ cost is the cost of ___ _________ (where there is no discount for bulk purchasing since bulk purchase discounts reduce the cost of purchases) - D______ _______ costs are most often classed as a ________ cost even though basic wages are usually ______. - S_____ __________ is ________ in relation to the ________ or ______ of sales. - B_____ _________ for productivity to employees might be ________ once a certain level of ______ is achieved.

Answer 39

variable; raw materials; Direct labour; variable; fixed; Sales commission; variable; volume; value; Bonus payments; variable; output;

Question 40

If the relationship between total _________ cost and ________ of ______ can be shown as a curved line on a graph, the relationship is said to be _________.

Answer 40

variable; volume; output; curvilinear;

Question 41

CURVILINEAR VARIABLE COSTS / GRAPHS For a logarithmic graph, each extra unit of output causes a _____ _____ ____________ increase in cost. For an exponential graph, each extra unit of output causes a _____ _____ __________ increase in cost. The cost of a __________ scheme for individual workers with ____________ rates could behave in a _________ fashion if the rates increase by small amounts at progressively higher output intervals.

Answer 41

less than proportionate; more than proportionate; piecework; differential; curvilinear;

Question 42

A ____-________/_____ cost is a cost which contains both ______ and _________ components and so is partly affected by changes in the ______ of _________.

Answer 42

semi-variable; mixed; fixed; variable; level; activity;

Question 43

Examples of ____-________ costs: - Electricity and gas bills: --______ cost = rental charge -- _______ cost = charge per unit of electricity used - Salesman's salary: -- ______ cost = basic salary -- ________ cost = commission on sales made - Costs of running a car: -- ______ cost = registration, insurance -- ________ cost = petrol, oil, repairs (which vary with km travelled)

Answer 43

semi-variable; fixed; variable; fixed; variable; fixed; variable;

Question 44

The ____-___ method of determining _____ and _________ elements of _____ costs relies on the assumption that ______ costs are linear.

Answer 44

high-low; fixed; variable; mixed; mixed;

Question 45

Cost estimation involves the measurement of __________ costs to predict _______ costs.

Answer 45

historical; future;

Question 46

The a______ c__________ method is where the ________ responsible for e__________ costs will go through a list of the individual expenditure items which make up the ______ costs. Each item will be __________ as _____, _________ or ____-_________, and values will be assigned to these; probably by reference to the ___________ cost accounts with an adjustment for estimated cost _________. This technique depends on the __________ __________ of each manager and their skill and realism in estimating costs; and so only approximate accuracy can be expected.

Answer 46

account classification; manager; estimating; total; classified; fixed; variable; semi-variable; historical; inflation; subjective judgement;

Question 47

The ____-___ method is used to calculate the amount of ________ and _____ cost within a ____-_________ cost. It involves using ___ historical cost records.

Answer 47

high-low; variable; fixed; semi-variable; two;

Question 48

The major drawback to the ____-___ method is that only ___ h_________ cost records from _________ _______ are used in the cost estimation; therefore, the approximation may not be _________ The advantage of the method is its relative ___________

Answer 48

high-low; two historical; previous periods; accurate; simplicity;

Question 49

The Scatter Graph Method A ______ can be plotted of the __________ ____ from previous periods, and from this a ____-__-____-___ can be drawn. The advantage of the scatter graph over the high-low method is that a ________ _______ of __________ ____ is used in the estimation. The disadvantage is that the line is drawn by visual judgement and so is a _________ ___________.

Answer 49

graph; historical data; line-of-best-fit; greater quantity; historical data; subjective approximation;

Question 50

A more accurate technique for plotting a line of best fit is to use __________ ________. This statistical technique uses data from ____ ______ to establish the relationship between _____ and _____ of ________ as the equation of a straight line. y = a + bx a = _______ ______ b = ________ ______ per unit x = ________ of _______

Answer 50

regression analysis; past periods; costs; level; activity; fixed costs; variable costs; volume; output;

Question 51

Cost accountants tend to separate ____-________ costs into their _____ and ________ components. They therefore tend to treat costs as either _____ or __________.

Answer 51

semi-variable; fixed; variable; fixed; variable;

Question 52

Costs can also be classified by ____ _________ for the purposes of _________ __________ and _____ ___________.

Answer 52

cost element; inventory valuation; profit measurement;

Question 53

For the purposes of ________ __________ and _______ ___________, an accountant must calculate the cost of a single unit of _______ or _________. The total cost of a unit of _______ or ________ is made up of the following elements of cost: - m________ - l______ - o_____ ___________

Answer 53

profit measurement; inventory valuation; product; service; product; service; materials; labour; other expenses;