10 Questions
What is the basis for calculating the monthly depreciation amount of equipment?
Cost price of the equipment and depreciation policy
What is the nature of the stall rental expense?
Fixed cost
How do the costs of beef patties and cheese change with an increase in production level?
They increase in direct proportion to the number of burgers made
What is the salary of part-time workers based on?
Number of hours worked
What is the nature of the advertising expense?
One-time expense
What is the cost behavior of utilities with an increase in production level?
It increases in direct proportion to the number of burgers made
What is the basis for calculating the cost of mini-buns and wrapping materials?
Number of burgers made
What is the type of cost that is incurred at the opening of the stall and not recurring?
Startup cost
What is the cost behavior of the stall rental with an increase in production level?
It remains the same regardless of the number of burgers made
What is the cost behavior of the salary of part-time workers with an increase in production level?
It increases in direct proportion to the number of burgers made
Study Notes
Types of Costs
- Sunk costs are costs that cannot be recovered and are not avoidable even if the business is closed.
- Examples of sunk costs include advertising expense, cost of equipment purchased, and business registration fees paid.
Committed Costs
- Committed costs are costs that a company knows it will have to incur at a future date, usually based on contractual agreements.
- Examples of committed costs include rent on a long-term lease, 2-year mobile-phone contract, and monthly payments for fire insurance.
Cost Management
- Identification of direct and indirect costs is necessary to determine the cost and selling price of a product.
- Understanding how costs change is important to ascertain the financial impact of a business decision.
Financial Accountant vs. Management Accountant
- Financial accountants and management accountants have different roles and serve different functions within an organization.
Cost Behavior
- Variable costs increase in direct proportion to the level of output.
- Examples of variable costs include beef patties, cheese, special sauce, utilities, lettuce, onion, mini-buns, wrapping materials, and salary of part-time workers.
Fixed Costs
- Fixed costs do not change with the level of output.
- Examples of fixed costs include monthly rental cost for a 1-year contract, business registration fee, and depreciation of equipment.
Costs for Decision-Making
- Sunk costs and committed costs are not relevant in decision-making as they are the result of past decisions which cannot be reversed.
- Variable costs and fixed costs are relevant in decision-making.
Determine whether the given expenses are sunk costs or committed costs. Learn to distinguish between costs that cannot be recovered and those that are not avoidable even if a business is closed. Test your knowledge of cost management concepts.
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