17 Questions
What is the main characteristic of variable costs?
Increase as production increases
Which cost behavior decreases less proportionately as production increases?
Fixed costs
What type of cost involves tracing direct costs and allocating indirect costs to specific cost objects?
Cost assignment
In a Contribution Margin Income Statement, what does the contribution margin represent?
Total sales revenue minus total variable expenses
Which system involves determining direct materials, direct labor, and factory overhead costs simultaneously with manufacturing operations?
Actual Cost System
What are the two key characteristics of committed fixed costs?
They can't be significantly reduced without impairing profitability or long-run goals.
Which type of cost usually arises from annual decisions by management to spend in certain fixed cost areas?
Discretionary fixed cost
What is the characteristic of semi-variable costs?
They contain both fixed and variable elements.
Which type of inventory includes the cost of goods that have not been sold at the end of the accounting period?
Finished goods inventory
In cost classification according to traceability to cost objects, which costs can be economically traced to a single cost object?
Direct costs (traceable/separable)
Which type of cost contains both variable and fixed cost elements?
Mixed cost
What is the difference between committed cost and discretionary cost?
Committed cost is an inevitable consequence of a previous commitment, while discretionary cost is a matter of choice.
Which of the following is an example of a future cost?
Future cost
What is the main characteristic of an incremental cost?
It is the additional cost to determine feasibility of a particular alternative.
Which cost is irrelevant to future decisions?
Sunk cost
What type of cost is the value of the best alternative foregone?
Opportunity cost
Which type of cost is associated with the next unit or project?
Marginal cost
Study Notes
Value Added Cost
- Value added costs are costs that add value to the product and are necessary to satisfy consumer requirements.
- Effort should be made to eliminate costs that do not add value to the product.
Cost Behavior
- Cost behavior is the relationship between cost and activity, and how costs react to changes in an activity like production.
- Costs can be classified into three types: fixed, variable, and mixed.
- Fixed costs have a constant total amount and a decreasing per unit amount as production increases.
- Variable costs have a total amount that increases as production increases, and a per unit amount that decreases as production increases.
- Mixed costs have both fixed and variable elements.
Cost Assignment
- Cost assignment involves tracing direct costs and allocating indirect costs to designated cost objects.
- This enables the manager to calculate total cost and unit cost of products and services.
Systems of Cost Accumulation
- There are two systems of cost accumulation: actual cost system and standard cost system.
- Actual cost system determines direct materials, direct labor, and factory overhead costs as they occur simultaneously with manufacturing operation.
- The total cost of these are known only after the operation is completed.
Types of Fixed Costs
- Committed fixed costs are long-term in nature and cannot be significantly reduced even for short periods of time without impairing the organization's profitability or long-run goals.
- Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas.
Cost Classification
- Costs can be classified by type of inventory: raw materials, work-in-process, finished goods, and merchandise inventory.
- Costs can also be classified according to their traceability to cost objects: direct costs (traceable) and indirect costs (not traceable).
- Costs can be classified according to the time period for which they are incurred: historical cost (past) and future cost (budgeted).
Cost Classification for Decision-making
- Relevant costs are future costs that are different under one decision alternative than under another.
- Incremental cost is the difference in cost between two or more alternatives.
- Sunk cost is a past cost that has been incurred and is irrelevant to a future decision.
- Opportunity cost is the value of the best alternative foregone.
- Marginal cost is the cost associated with the next unit or the next project.
Test your knowledge on the key characteristics of committed fixed costs, discretionary fixed costs, and semi-variable costs. Understand the distinctions between long-term committed costs, managed fixed costs, and costs with both fixed and variable elements.
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