Podcast
Questions and Answers
What is the primary characteristic of fixed costs?
What is the primary characteristic of fixed costs?
- They are considered variable costs.
- They increase as production volume decreases.
- They change with production volume.
- They remain constant in total, regardless of volume changes. (correct)
Which of the following is an example of relevant information in decision-making?
Which of the following is an example of relevant information in decision-making?
- Historical costs from the previous year.
- Current market conditions affecting future sales. (correct)
- Past profits from a similar product.
- Total costs incurred last month.
How does fixed cost per unit change with varying levels of production?
How does fixed cost per unit change with varying levels of production?
- It remains the same regardless of production level.
- It is unaffected by changes in production volume.
- It increases as more units are produced.
- It decreases as more units are produced. (correct)
What does the Margin of Safety measure?
What does the Margin of Safety measure?
Which costing method is appropriate for analyzing the cost per equivalent unit of production in a process?
Which costing method is appropriate for analyzing the cost per equivalent unit of production in a process?
What is the effect of high operating leverage on a business's profits?
What is the effect of high operating leverage on a business's profits?
Which term refers to the additional total revenue generated from an activity?
Which term refers to the additional total revenue generated from an activity?
What does Sensitivity Analysis primarily assist managers in understanding?
What does Sensitivity Analysis primarily assist managers in understanding?
Which of the following is NOT classified as a period cost?
Which of the following is NOT classified as a period cost?
What definition best illustrates a cost function?
What definition best illustrates a cost function?
Which of the following statements about direct costs is accurate?
Which of the following statements about direct costs is accurate?
What distinguishes indirect costs from direct costs?
What distinguishes indirect costs from direct costs?
Which of the following accurately describes overhead costs?
Which of the following accurately describes overhead costs?
In terms of cost assignment, what does the term 'tracing' refer to?
In terms of cost assignment, what does the term 'tracing' refer to?
Which costs are classified as variable costs?
Which costs are classified as variable costs?
Which statement best characterizes the process of cost allocation?
Which statement best characterizes the process of cost allocation?
What role do indirect costs play in total production costs?
What role do indirect costs play in total production costs?
What is the primary characteristic of a cost object?
What is the primary characteristic of a cost object?
How are overhead costs typically treated in a manufacturing environment?
How are overhead costs typically treated in a manufacturing environment?
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Study Notes
Cost Concepts
- Cost Object: Any entity for which costs are measured, such as a specific product.
- Cost Function: Mathematical model illustrating the relationship between cost and activity level.
- Cost Assignment: Process of tracking accumulated costs to a specific cost object.
Cost Tracing and Allocation
- Tracing: Identifies direct costs linked to a cost object, like materials and labor for a water bottle.
- Allocating: Distributes indirect costs that cannot be directly traced to a cost object, such as factory maintenance expenses.
Types of Costs
- Direct Costs: Easily traced to a cost object, such as the materials for a vehicle.
- Indirect Costs: Cannot be directly traced; typically allocated to cost objects, like overall factory overhead.
Cost Classifications
- Overhead Costs: Indirect costs not directly tied to production.
- Variable Costs: Change with the level of production; more units increase total costs.
- Fixed Costs: Do not change with production volume; costs like rent remain constant unless renegotiated.
Cost Per Unit Dynamics
- Variable Cost Per Unit: Remains constant regardless of quantity produced; total cost varies with volume.
- Fixed Cost Per Unit: Decreases as production increases; total fixed costs spread over more units.
Cost Structure
- Cost Driver: Variable impacting total cost based on activity level, e.g., km driven affects petrol cost.
- Relevant Range: Activity level where specific cost relationships hold true, applicable to fixed costs.
Product Costs
- Conversion Costs: Expenses associated with transforming raw materials into finished goods.
- Prime Cost: Total direct costs, combining materials and labor.
- Inventoriable Costs: Costs tied to inventory, treated as assets until sold.
Inventory Types
- Manufacturing Inventory: Direct materials ready for use.
- Work-in-process: Products partially completed.
- Finished Goods: Products ready for sale.
Costing Methods
- Job Costing: Tracks costs individually for unique items or projects.
- Process Costing: Applies to mass production of similar items through standardized processes.
Financial Analysis Tools
- CVP Analysis: Examines profit impact from changes in sales volume, price, or cost.
- Assumptions include linear cost behavior and constant cost structure.
Margin of Safety
- Indicates the difference between actual sales and breakeven sales, providing insight into risk.
Sensitivity Analysis
- Evaluates how variations in key inputs impact profitability within CVP analysis.
Costing Approaches
- Weighted Average Process-Costing: Determines cost per equivalent unit, accounting for both completed and in-process items.
- Operating Leverage: Measures the sensitivity of profit to changes in sales volume, influenced by the ratio of fixed to variable costs.
Decision-Making Considerations
- Relevant Information: Future-oriented differences among alternatives; includes expected costs and revenues.
- Irrelevant Information: Historical costs that do not affect current decision-making.
Incremental Measures
- Incremental Revenue and Costs: Focus on additional revenue and costs tied to specific activities.
- Differential Revenue and Costs: Differences in revenue/cost between alternatives assist in evaluating options.
Cost Allocation Issues
- Over costing: Low resource-consuming products receive exaggerated cost allocations.
- Under costing: High resource-consuming products receive insufficient cost allocations.
Costing Techniques
- Peanut Butter Costing: Uses broad averages to allocate costs uniformly across products.
- Activity-Based Costing (ABC): Allocates costs based on actual resource utilization by activities, enhancing cost accuracy and providing relevant insights.
Value Chain Components
- Research & Development: Focused on innovation and product enhancement.
- Design: Involves planning product design and manufacturing processes.
- Production: Covers labor and materials in the creation of products.
- Marketing: Focus on consumer preferences and targeted promotional strategies.
- Distribution: Expenses related to delivering products to customers.
- Customer Service: Managing customer inquiries post-sale.
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