Podcast
Questions and Answers
What does opportunity cost represent?
What does opportunity cost represent?
Which cost is defined as incurred in the past and irrelevant for future decision-making?
Which cost is defined as incurred in the past and irrelevant for future decision-making?
Differential costs are important in decision-making primarily because they indicate what?
Differential costs are important in decision-making primarily because they indicate what?
In a manufacturing business, costs typically follow which flow?
In a manufacturing business, costs typically follow which flow?
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Which of the following represents indirect costs in a business?
Which of the following represents indirect costs in a business?
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Which costs are considered controllable within a business?
Which costs are considered controllable within a business?
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What distinguishes direct costs from indirect costs?
What distinguishes direct costs from indirect costs?
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If a business is faced with increasing storage costs that do not depend on production levels, these costs are classified as what?
If a business is faced with increasing storage costs that do not depend on production levels, these costs are classified as what?
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Which of the following best describes direct costs?
Which of the following best describes direct costs?
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Which of the following is an example of an indirect cost?
Which of the following is an example of an indirect cost?
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What distinguishes controllable costs from uncontrollable costs?
What distinguishes controllable costs from uncontrollable costs?
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Which item is classified as a controllable cost?
Which item is classified as a controllable cost?
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Direct labour costs in a manufacturing setting refer to which aspect?
Direct labour costs in a manufacturing setting refer to which aspect?
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Which of the following costs is least likely to be considered an indirect cost?
Which of the following costs is least likely to be considered an indirect cost?
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What is a common misconception about indirect costs?
What is a common misconception about indirect costs?
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Which of the following best defines uncontrollable costs?
Which of the following best defines uncontrollable costs?
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Which of the following is considered a direct cost in production?
Which of the following is considered a direct cost in production?
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What happens to raw materials inventory when production begins?
What happens to raw materials inventory when production begins?
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How are service costs primarily accumulated?
How are service costs primarily accumulated?
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Which of the following correctly describes the overhead costs?
Which of the following correctly describes the overhead costs?
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What are the four main stages that inventory costs move through in production?
What are the four main stages that inventory costs move through in production?
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Which type of cost is typically considered an uncontrollable cost in manufacturing?
Which type of cost is typically considered an uncontrollable cost in manufacturing?
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Which of the following best illustrates the key difference between manufacturing and service costs?
Which of the following best illustrates the key difference between manufacturing and service costs?
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When a company sells its finished products, what does it signify in terms of cost flow?
When a company sells its finished products, what does it signify in terms of cost flow?
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Study Notes
Cost Concepts & Behaviour
- Management accounting uses cost concepts and measurements for management
- Costs flow through a business
- Costs respond to changes in activity levels
- Direct and indirect costs, controllable and uncontrollable costs are explained
Definition of Costs
- Cost refers to the monetary value of resources consumed in producing goods/services
- All businesses incur costs, regardless of size or industry
- Costs include expenses like ingredients, rent, and staff wages (example of a restaurant) and raw materials, factory rent, and worker wages (example of a car manufacturing company)
- A cost object is anything for which costs are calculated and assigned (e.g., product, department)
Role of Costs in Decision-Making
- Costs are crucial for planning, control, and decision-making by managers
- Planning involves forecasting costs to allocate resources effectively and avoid shortfalls
- Control involves monitoring costs to stay within budget and identify inefficient areas
- Decision-making includes analyzing costs to decide if to produce a product internally or externally, launch new products, or discontinue others
Types of Costs: Manufacturing Business Example
- Direct Material Costs: Raw materials that are part of the final product (e.g., fabric in a T-shirt)
- Direct Labour Costs: Wages of employees directly involved in production (e.g., sewing machine operators)
- Factory Overhead: Indirect manufacturing costs not traceable to specific units (e.g., lubricants, factory rent, utilities).
Non-Manufacturing Costs
- Costs unrelated to production
- Typically categorized as selling and distribution expenses (marketing, promotion, distributing products) and administrative expenses (general management, operation)
Comparison Between Manufacturing and Non-Manufacturing Costs
- Manufacturing costs are related to production in the factory
- Non-manufacturing costs are related to selling, distribution, and administration (examples: advertising, salaries, shipping)
Service Business Example
- In service industries, costs are linked to human resources, such as employee salaries and benefits, unlike physical product manufacture
Economic Cost Concepts
- Opportunity Cost: Potential benefits lost from choosing one alternative over another (e.g., investment in machinery vs marketing)
- Sunk Cost: Costs incurred in the past that cannot be recovered; not relevant for future decisions (e.g., cost of existing equipment)
- Differential Cost (Incremental Cost): Difference in cost between two alternatives (e.g., increasing production)
Flow of Costs in a Business (Manufacturing)
- Production costs are categorized into direct materials, direct labor, and overhead
- Costs flow through inventory stages (Raw Materials, Work in Progress, Finished Goods) to become the Cost of Goods Sold (COGS)
- Costs associated with the items are tracked through each stage
Stages in Cost Flow
- Raw Materials Inventory: Value of all raw materials ready for production
- Work in Progress (WIP): Costs of partially completed products
- Finished Goods Inventory: Value of completed products ready for sale
- Cost of Goods Sold (COGS): Total cost of goods sold during a period
Response of Costs to Changes in Activity Levels
- Fixed Costs: Remain constant regardless of activity levels (e.g., rent, salaries)
- Variable Costs: Change directly with activity levels (e.g., raw materials, wages based on hours worked)
- Mixed Costs: Combine fixed and variable components (e.g., electricity)
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