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Questions and Answers
What is opportunity cost?
Which type of cost is constant regardless of production levels?
What does the marginal cost represent?
What is the break-even point?
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What does incremental cost refer to?
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Which type of costs are directly associated with a specific product?
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What does the term 'contribution margin' refer to?
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How is marginal revenue defined?
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What is the primary purpose of a pricing strategy in market stability?
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What does the term 'survival pricing' refer to?
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Which pricing strategy involves meeting the prices set by competitors?
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What is 'value-based pricing' primarily determined by?
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Which of the following is a characteristic of 'bundle pricing'?
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What are 'direct materials' categorized as?
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Which term describes the difference between the cost of a good and its selling price?
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What does 'psychological pricing' take into account?
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What does blended cost aim to achieve for a company's product range?
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What is a cost driver?
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How long should accounts receivable ideally be targeted for in days?
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What can significantly impact cash flow and profitability?
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What is the estimated cost to issue an invoice?
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What is market penetration pricing primarily intended for?
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What does strategic sourcing often lead companies to?
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What pricing strategy is typically used by start-ups?
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What are fixed costs?
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What constitutes a sunk cost?
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Which type of cost has both fixed and variable components?
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What are revenue expenditures?
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What is the definition of opportunity cost?
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Which of the following describes common costs?
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What is a relevant cost?
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What are committed fixed costs?
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Study Notes
Cost Definitions
- Cost: All expenses incurred to produce a good or service.
- Opportunity Cost: The potential gain (benefit) lost by choosing one option over another. For example, the potential profit lost by not investing in a particular venture.
- Fixed Cost: Costs that remain unchanged, regardless of production volume.
- Variable Cost: Costs that fluctuate directly with the volume of production or sales.
- Total Costs: Total cost comprises fixed costs plus variable costs.
- Marginal Cost: The additional cost of producing one more unit of a good or service.
- Direct Costs: Costs that are directly traceable to a specific product or service
- Indirect Costs: Costs that cannot be linked to a specific cost object and are often allocated across multiple products or services.
- Incremental Cost: The change in total cost resulting from a particular managerial decision.
- Overhead Costs: Costs necessary for supporting the ongoing operations of a business but not directly related to the production of goods or services.
- Operating Costs: Recurring expenses associated with the daily functioning of a business.
Marginal Cost, Marginal Revenue, & Profit
- Marginal Revenue: The additional revenue earned by producing and selling one more unit of a good or service.
- Marginal Profit: The change in profit from producing and selling one more unit of a good or service.
- Contribution Margin: The per-unit profit generated from a sale, calculated as the difference between the selling price and the variable cost per unit.
- Break-Even Point: The point at which total revenue equals total cost, resulting in no profit or loss.
Cost Analysis
- Bill of Materials: A document that lists all direct inputs required for the production of a product.
- Optimal Production Level: The production level that achieves the lowest total cost while maximizing efficiency and profitability.
Cost Management
- Asset Efficiency: Optimizing the use of company assets to maximize cash flow and profitability.
- Transaction Costs: Costs associated with the exchange of goods or services, often overlooked. Examples include costs associated with customer service, invoicing, accounts payable, and purchasing.
- Portfolio Management: Assessing and managing the profitability of different products within a company's product portfolio.
- Strategic and Counter Sourcing: Developing sourcing strategies that minimize costs and optimize supply chain efficiency.
- Outsourcing: Hiring external companies or individuals to perform specific tasks or services for a company.
- Unprofitable Products Review and Elimination: Identifying and eliminating products that consistently fail to generate a profit.
Pricing Strategies
- Cost Determination: Establishing a strong understanding of the cost of production before setting a price.
- Market Penetration Pricing: Setting a low price to gain market share and discourage competition.
- Price Skimming: Setting a high initial price for a new product to capture early adopters willing to pay premium prices, then gradually lowering the price as new competitors enter the market.
- Market Stability Pricing: Maintaining stable prices to avoid disrupting the market and ensure price stability for consumers.
- Margin Capture Pricing: Using a high price to capture a substantial profit margin, typically for products with limited competition or high demand.
- Differentiation Pricing: Setting a higher price based on unique product features or perceived value, aiming to differentiate the product from alternatives.
- Standard or Uniform List Price: Making a single price list available to all customers.
- F.O.B Pricing (Free on Board): The seller is responsible for all costs incurred until the goods reach a designated location.
- Zone Pricing: Charging different prices based on geographic location to account for varying costs of transportation and distribution.
- Bundle Pricing: Offering discounts for purchasing a group of products together.
- Line Pricing: Charging a consistent price for products within a similar category.
- Competitor or Follow the Leader Pricing: Setting prices based on the prices charged by major competitors.
- Survival Pricing: Selling products at cost to generate short-term cash flow and avoid business failure.
Competitive Pricing Analysis
- Competitive Pricing/Distribution Analysis: Understanding the pricing strategies and distribution models of competitors to gain a competitive advantage.
- Retail Margin: The profit margin generated from a product, calculated as the difference between the selling price and the cost of goods sold.
- Retail Markup: The percentage increase from the cost of a good or service to its selling price.
- Competitive Positioning: Determining the placement of a product in the market based on features, price, value, and competition.
Setting the Price
- Value Base Pricing: Setting a price based on the perceived value of the product to the customer.
- Psychological Pricing: Setting a price based on perceived quality, desirability, or brand image.
- Customary Price Points: Setting prices within a generally accepted price range for that product category.
- Substitution Pricing: Setting a price point that makes the product competitive with substitute products available in the market.
Manufacturing Costs
- Direct Materials: Raw materials that are directly incorporated into a finished product.
- Direct Labor: Wages paid to workers directly involved in the production of a product.
- Factory Overhead: Indirect manufacturing costs not directly tied to materials or labor, such as factory utilities, rent, depreciation, and indirect labor.
Non-Manufacturing Costs
- Marketing or Selling Expense: Costs associated with promoting and selling a product, such as advertising, sales salaries, and transportation.
- General or Administrative Expense: Costs associated with the overall operation of a business, such as executive salaries, legal fees, and accounting expenses.
Costs Classified by Variability
- Variable Costs: Costs that change proportionally with the volume of production.
- Fixed Costs: Costs that remain constant regardless of production volume.
- Committed Fixed Costs: Long-term fixed costs resulting from management commitments, such as lease agreements or long-term contracts.
- Managed Fixed Costs: Fixed costs that can be adjusted or modified in the short term, such as advertising expenses or employee training.
- Mixed Costs: Costs that have both fixed and variable components.
- Semi-Variable Costs: Costs with a fixed minimum charge plus a variable component, such as a monthly phone plan with a fixed amount plus per-minute charges.
- Step Costs: Fixed costs that change abruptly at different activity levels, such as hiring additional employees when reaching a production threshold.
Costs Classified by Department
- Direct Departmental Charges: Costs directly associated with a particular department.
- Indirect Departmental Charges: Costs initially charged to other departments that are later allocated to the benefiting department.
Costs Classified by Nature
- Common Costs: Costs shared jointly by two or more activities, products, or services.
- Joint Costs: Costs incurred in the production of multiple products simultaneously.
Costs Classified by Accounting Period
- Capital Expenditures: Costs associated with long-term assets that provide benefits over multiple accounting periods, recorded as assets on the balance sheet.
- Revenue Expenditures: Costs associated with short-term expenses that benefit only the current accounting period, recorded as expenses on the income statement.
Costs for Planning, Control, and Analysis
- Standard Costs: Predetermined costs used as benchmarks for budgeting, performance evaluation, and cost control.
- Opportunity Cost: The potential benefit forgone by choosing one alternative over another.
- Differential Cost: The difference in cost between two alternative choices.
- Relevant Cost: A future cost that will differ across alternative decisions.
- Out-of-Pocket Cost: A cost that requires the actual outlay of cash or assets.
- Sunk Cost: A cost incurred in the past that is not relevant to future decisions.
- Controllable Cost: A cost that a specific level of management has the authority to authorize.
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Description
Test your understanding of key cost concepts used in economics and business. This quiz covers definitions like fixed costs, variable costs, opportunity costs, and more. Perfect for students in finance or accounting!
