Cost Analysis Concepts Quiz

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.