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Questions and Answers
What type of costs are specifically traced to individual product units?
Which of the following costs are considered variable costs?
What classification of cost remains constant in total, regardless of activity levels within a relevant range?
Which type of cost can be classified as a committed fixed cost?
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What is the term for costs that include both fixed and variable components?
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Which type of cost is incurred to secure customer orders?
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What kind of costs are not practically traced to specific product units?
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What describes costs that are specifically charged to particular manufacturing departments?
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What is primarily the goal of managerial finance in a business context?
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Which of the following best describes the nature of managerial finance?
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Which statement accurately reflects the scope of managerial finance?
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In the context of managerial finance, what role do shareholders play?
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How has globalization affected financial management according to the content provided?
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What type of cost is classified as benefiting only the current accounting period?
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Which costs are not specifically identifiable with any of the products manufactured simultaneously?
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Which cost represents the potential benefit that is sacrificed when one alternative is chosen over another?
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What type of cost is expected to provide benefits across multiple accounting periods and recorded as an asset?
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Which cost is incurred as a result of utilizing monetary payment or other assets?
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What type of cost should not be considered in investment decisions due to its nature of being already incurred?
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Which of the following costs is considered a benchmark for budgetary control in production?
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Which cost would change based on the selection of different alternatives during decision-making?
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What is the primary function of the derivative market related to price movements of underlying assets?
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Which market is characterized by dealing with securities that have a life of one year or less?
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What differentiates a futures contract from a forwards contract?
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What is the primary goal of investment decisions made by financial managers?
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In which type of contract does the buyer have an obligation to fulfill their commitment to buy or sell?
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Which factor is NOT considered in financing decisions?
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Which type of contract gives the buyer the right, but not the obligation, to purchase the underlying asset?
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What is a crucial aspect of dividend decisions?
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What is a key advantage of using derivative instruments in investment?
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What role does the Philippine Stock Exchange (PSE) play in the financial market?
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How long do securities in the intermediate capital markets usually last?
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Which of the following statements about options contracts is true?
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What does the term 'market data' refer to in the context of the Philippine Stock Exchange?
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Which service is NOT provided by the post-trade segment of the PSE?
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How does the PSE contribute to maintaining market integrity?
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Which decision focuses on the balance of debt and equity for financing investments?
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Study Notes
Cost
- Cash or equivalent value sacrificed for goods or services that are expected to bring current or future benefit to the organization
- Cost is directly related to the benefit (revenue)
Cost Classifications
- Product Cost/ Inventoriable Cost/ Manufacturing Costs - These costs are directly involved in the production of goods.
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Inventoriable Costs are costs that are included in the cost of inventory.
- Direct Materials - Materials that become part of the finished product and can be traced directly to a specific product unit.
- Direct Labor - The wages paid to workers directly involved in the production of goods. This cost can also be traced directly to a product unit.
- Factory Overhead - Costs associated with the manufacturing process, but cannot be directly traced to a specific product unit.
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Period Costs/ Non-Manufacturing Costs - These costs are not included in the cost of inventory They are expenses related to the operation of the business, but are not directly related to the production of goods.
- Marketing/ Selling Expenses - Costs incurred to secure customer orders and deliver products to customers.
- General/ Administrative Expenses - Costs associated with the overall operation of the business, including executive, organizational, and clerical expenses.
Cost Variability
- Activity - Measure of the organization's output of products or services.
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Relevant Range - Limits the description of costs to a specific range of activity.
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Fixed Costs - Costs that remain constant in total within the relevant range.
- Committed Fixed Costs - Long-term commitments that are difficult to change in the short-term.
- Managed Fixed Costs - Short-term commitments that can be adjusted more easily in response to changes in management objectives.
- Variable Costs - Costs that vary directly in total as the volume of activity changes. Variable costs per unit remain constant as volume changes.
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Mixed Costs - Costs that have both a fixed and a variable component. They vary with the level of production, but not in a direct relationship.
- Semi-Variable Costs - Costs that have a fixed component and a variable component that varies in proportion to the volume of production.
- Step Costs - Costs that remain fixed for a certain range of activity, but increase in steps as activity increases.
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Fixed Costs - Costs that remain constant in total within the relevant range.
Manufacturing and Business Costs
- Direct Departmental Charges - Costs that are charged directly to a specific manufacturing department.
- Indirect Departmental Charges - Costs that are charged to a different manufacturing department, such as overhead costs.
- Common Costs - Costs that are shared by two or more departments, operations, commodities, or services. These costs keep the business running (Ex. depreciation of a building shared by two departments).
- Joint Costs - Costs that are incurred in the production of two or more products at the same time. These costs are not specifically identifiable with any one of the products, but are the result of the necessary expenses for the production of multiple products (e.g., costs incurred in the production of two products up to the point of split-off).
Cost Over Time
- Capital Expenditures - Expenses that benefit more than one accounting period, recorded as an asset.
- Revenue Expenditures - Expenses that benefit only the current accounting period and are recorded as an expense.
Costs for Planning, Control, and Analysis
- Standard Costs - Predetermined costs of a product or service used for planning, control, and decision-making.
- Opportunity Costs - The benefit given up when one alternative is chosen over another. Opportunity costs are not usually recorded in the accounting system, but should be considered when evaluating alternatives for decision-making.
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Differential Costs- Costs that are present under one alternative but are absent in all or part of another alternative.
- Incremental Costs - The increase in cost associated with one alternative.
- Decremental Costs - The decrease in cost associated with one alternative
- Relevant Costs - Future costs that change across different alternatives. (e.g., cost of goods sold, advertising, commissions, warehouse depreciation).
- Out-of-Pocket Costs - Costs that require the payment of money or other assets.
- Sunk Costs - Costs that have already been incurred and cannot be changed by current or future decisions. Sunk costs are not differential costs and are not relevant to decision-making. Sunk costs are typically considered fixed costs, and should not be included in the decision-making process as they are not recoverable.
- Controllable Costs - Costs that can be influenced by the decisions made by a particular manager, based on their level of responsibility.
Financial Management
- A decision-making process concerned with planning, acquiring, and utilizing funds to achieve organizational goals.
- The focus of financial management is to maximize shareholder wealth through maximizing firm wealth.
- Financial managers must make decisions in the best interest of the shareholders by making decisions that increase the value of the firm or stock.
Goal of Financial Management
- To maximize shareholder wealth.
- Shareholders are the residual owners of the firm, meaning they are only paid after all other expenses and claims have been satisfied.
Scope of Financial Management
- Acquisition, financing, and management of assets.
- Acquire funds needed by the firm and invest those funds in profitable ventures to maximize the firm's wealth.
- Procurement of short-term and long-term funds from financial institutions.
- Mobilization of funds through financial instruments, such as stocks, bonds, and debentures.
- Compliance with legal and regulatory provisions relating to funds procurement, use, and distribution.
- Coordination of the finance function with the accounting function.
- Globalization has created new challenges and opportunities for financial management. As economies become more integrated, financial managers need to be aware of the global financial environment.
Three Types of Financial Management Decisions
- Investment Decisions - Decisions related to the acquisition of long-term assets.
- Financing Decisions - Decisions related to the mix of debt and equity used to finance investments.
- Dividend Decisions - Decisions related to the allocation of profits to shareholders.
Philippine Stock Exchange (PSE)
- The only stock exchange in the Philippines.
- Regulates and serves the Philippine equities market.
- Offers a wide range of services, including listing, trading, market data, clearing, and settlement.
PSE Listing
- A viable destination for companies seeking to go public.
- A platform for equity financing and long-term growth.
PSE Trading
- Offers a diverse pool of global and domestic trading participants.
- Provides a smooth and transparent trading experience to investors.
PSE Market Data
- Provides extensive market data.
- Supports investors in developing and maximizing trading strategies.
PSE Post-Trade
- Offers clearing, settlement, and collateral management services.
- Promotes counterparty risk management and ensures transparency and integrity of the Philippine market.
Financial Markets
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Money Market - A market that deals with short-term debt securities.
- Maturity: 1 year or less.
- Examples: Commercial paper, time deposits with a term of less than one year.
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Capital Market - A market that deals with long-term debt securities and equities.
- Maturity: More than one year.
- Intermediate Market: 1-10 years.
- Long-term Market: Longer than 10 years.
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Derivative Market - A market that deals with derivative instruments whose value is derived from an underlying asset.
- Price Discovery - Reflects market sentiment and expectations about the future price of the underlying asset. Provides valuable insight into market trends.
- Risk Management - Investors use derivatives to hedge against adverse price movements in the underlying asset. -Operational Advantages - Allows investors to gain exposure to various asset classes without having to own the underlying asset.
- Capital Efficiency - Often requires lower initial capital outlay.
Derivative Instruments
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Futures Contract - An obligation to buy or sell an asset at a fixed price on a particular date.
- Standardized contracts that trade on an exchange.
- Used to hedge risks or speculate on the price of an underlying asset.
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Forwards Contract - Similar to futures contracts, but are not traded on an exchange.
- They are traded over-the-counter.
- The terms of the contract can be customized.
- Carry a higher degree of counterparty risk.
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Options Contract - Gives the buyer the right, but not the obligation, to buy or sell an asset at a fixed price on a particular date.
- Can be used to speculate on the price of the underlying asset.
- Put-Option - Gives the buyer the right to sell the underlying asset at the price it was negotiated at during the contract period
- Call-Option - Gives the buyer the right to buy the underling asset at the price it was negotiated at during the contract period.
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Description
Dive into the essential concepts of cost classifications in accounting, including product costs, period costs, and their components. Understand the differences between direct materials, direct labor, factory overhead, and how they affect inventory and financial statements. This quiz will test your knowledge on how costs influence organizational benefits.
