Podcast
Questions and Answers
What does opportunity cost represent?
What does opportunity cost represent?
- The total cost incurred for producing a product
- The cost that has already been incurred and cannot be recovered
- The savings generated from not making a purchase
- The potential benefits lost when choosing one alternative over another (correct)
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?
- Incremental cost
- Differential cost
- Sunk cost (correct)
- Opportunity cost
Differential costs are important in decision-making primarily because they indicate what?
Differential costs are important in decision-making primarily because they indicate what?
- The additional cost or savings between two alternatives (correct)
- The fixed costs of production
- The potential revenue from all alternatives
- The total accumulated costs over time
In a manufacturing business, costs typically follow which flow?
In a manufacturing business, costs typically follow which flow?
Which of the following represents indirect costs in a business?
Which of the following represents indirect costs in a business?
Which costs are considered controllable within a business?
Which costs are considered controllable within a business?
What distinguishes direct costs from indirect costs?
What distinguishes direct costs from indirect costs?
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?
Which of the following best describes direct costs?
Which of the following best describes direct costs?
Which of the following is an example of an indirect cost?
Which of the following is an example of an indirect cost?
What distinguishes controllable costs from uncontrollable costs?
What distinguishes controllable costs from uncontrollable costs?
Which item is classified as a controllable cost?
Which item is classified as a controllable cost?
Direct labour costs in a manufacturing setting refer to which aspect?
Direct labour costs in a manufacturing setting refer to which aspect?
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?
What is a common misconception about indirect costs?
What is a common misconception about indirect costs?
Which of the following best defines uncontrollable costs?
Which of the following best defines uncontrollable costs?
Which of the following is considered a direct cost in production?
Which of the following is considered a direct cost in production?
What happens to raw materials inventory when production begins?
What happens to raw materials inventory when production begins?
How are service costs primarily accumulated?
How are service costs primarily accumulated?
Which of the following correctly describes the overhead costs?
Which of the following correctly describes the overhead costs?
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?
Which type of cost is typically considered an uncontrollable cost in manufacturing?
Which type of cost is typically considered an uncontrollable cost in manufacturing?
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?
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?
Flashcards
Direct Costs
Direct Costs
Expenses directly linked to producing a specific product or service. Easy to identify and allocate.
Examples of Direct Costs
Examples of Direct Costs
Raw materials (e.g., steel, flour) and direct labor (e.g., wages of assembly workers).
Indirect Costs
Indirect Costs
Expenses not directly traceable to a specific product, but necessary for the business. Shared across products.
Examples of Indirect Costs
Examples of Indirect Costs
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Controllable Costs
Controllable Costs
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Examples of Controllable Costs
Examples of Controllable Costs
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Uncontrollable Costs
Uncontrollable Costs
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Examples of Uncontrollable Costs
Examples of Uncontrollable Costs
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Opportunity Cost
Opportunity Cost
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Sunk Cost
Sunk Cost
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Differential Cost
Differential Cost
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Cost Flow
Cost Flow
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What is the cost of choosing one option over another?
What is the cost of choosing one option over another?
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Why are sunk costs irrelevant for decision-making?
Why are sunk costs irrelevant for decision-making?
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What is an example of opportunity cost?
What is an example of opportunity cost?
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Describe cost flow in a manufacturing business
Describe cost flow in a manufacturing business
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Direct Materials
Direct Materials
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Direct Labour
Direct Labour
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Overhead
Overhead
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Raw Materials Inventory
Raw Materials Inventory
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Work in Progress (WIP)
Work in Progress (WIP)
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Finished Goods Inventory
Finished Goods Inventory
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Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS)
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Service Costs
Service Costs
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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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