| What is a cost? | A cost is a resource sacrificed or foregone to achieve a specific objective. Better known as something you used to produce a product. |
| What is a cost object? | A thing that costs are assigned to. I.e., A bike where the costs for producing the bike is traced to the bike. Hence, the bike is the cost object. |
| What is cost accounting | The costs are assigned to various cost objects. |
| What is cost accumulation | Is the collection of cost data in some organised way by means of an accounting system. Also known as the cost pool, where these costs are assigned to each cost object. |
| What is the difference between direct and indirect costs | Direct costs are costs that are related to the cost object directly and can be measured directly in money terms. I.e., tires used to produce a car. Hence, the costs can be put directly on the cost object.
Indirect costs cannot be traced directly to the cost object; hence these costs are allocated to the cost object. |
| What is the 4 things that determines if it is a direct or indirect cost? | 1. Materiality of the cost in question (Is it rent, spare parts etc?)
2. Available information-gathering technology (Is there an accounting system in place to trace the cost directly to the cost object?)
3. Design of operation
4. Choice of cost object |
| What is the difference between fixed and variable costs? | A variable cost is a cost that changes depending on the number of units produced.
A fixed cost does not change no matter the number of units produced. |
| What is a cost driver? | A cost driver is driver that affects the cost. For instance, number of bicycles produced drives the total cost of tires up or down. |
| What manufacturing costs do we have, and how are they defined? | 1. Direct materials cost: The acquisition cost of materials used to produce the cost object that can be traced directly in an economically feasible way.
2. Direct manuf. labor costs: The compensation spend on workers that can be traced directly to the cost object in an economically feasible way.
3. Indirect manuf. costs: Other manufacturing costs considered to be apart of the cost object, but cannot be traced in an economically feasible way. |
| What is capitalised costs, and how do they differ between types of companies? | For manufacturing companies, capitalized costs include direct materials, direct labor, and indirect manufacturing costs, hence they are included in WIP and finished stock and ultimately in the COGS account on the P/L statement.
For merchandising-sector companies, capitalized costs are the costs of purchasing the products resold in their same form.
For service sector companies, the absence of stock means there are no capitalized costs. |
| What is revenue costs, and how do they differ between types of companies? | For manufacturing companies, revenue costs are all non-manufacturing costs (R&D, distribution etc.)
For merchandising companies revenue costs include all costs not related to COGS (Capitalized costs).
For service sector companies, all costs are revenue costs. |
| What is the difference between prime costs and conversion costs? | Prime costs are all direct manufacturing costs (Direct materials and labor).
Conversion costs are all costs other than direct materials cost e.g., manufacturing labor, indirect materials, energy, plant depreciation etc. |
| Why must unit costs be interpreted with care? | Unit costs are calculated as total costs / units. Hence, it is calculated including both fixed costs and at a certain level of activity. This is troublesome for effective decision making, as changes in both of those values are hard to compare with other changes. |
| What is an overhead cost? | Overhead costs, often referred to as overhead or operating expenses, refer to those expenses associated with running a business that can’t be linked to creating or producing a product or service. They are the expenses the business incurs to stay in business, regardless of its success level. |
| What is a variable and fixed overhead costs? Give examples of each. | A variable overhead cost is a cost that is variable depending on the cost driver, but is still a cost incurred by running the business but cannot be linked to a product. This could be water, electricity or other indirect materials/labor.
A fixed overhead cost is a fixed cost incurred by running the business but cannot be linked to a product. This could be water, electricity or other indirect materials/labor. |
| What types of companies is there, what defines each and what is typically the most significant cost driver? | 1. Service companies: Provides services or intangible products to their customers. Labor is often the most significant cost category.
2. Merchandising companies: Sell goods without changing their basic form. COGS is often the most significant cost category.
3. Manufacturing companies: Purchases materials and components and produce a product. Materials and labor costs are often the most significant cost category. |
| How does a production/service company's P/L statement look? | d |
| What is an activity based cost driver and what are some examples of these? | An activity based cost driver is a cost driver that gives away of measuring a quantity of an activity. |
| What factors do we have to assess customer value? | 1. Short-run and long-run customer profitability.
2. Likelihood of customer retention.
3. Potential for customer growth.
4. Customer reputation.
5. Ability to learn from customers. |
