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Mod 1, Appendix: Accounting techniques for supporting operational management
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- 1Costs ClassificationsCosts can be classified in different ways to support different types of decisions. Costs exhibit different types of behaviour. Ie. When activity levels change, different types of costs react differently.
- 2Direct/Indirect CostsDirect Cost: can be directly traced to a specific cost object such as a product.
Indirect Cost: (overheads) not capable of being traced directly in a cost-efficient or accurate manner - 3Cost ObjectAny item for which cost information needs to be obtained. Ie. Job, product, service, department, customer or whole organisation.
- 4What is the benefit of costs being directly link costed to products or services?The accuracy and usefulness of costing information is significantly improved, which supports efforts such as determining which product lines are profitable and setting prices.
- 5Fixed/Variable CostsA fixed cost stays the same regardless of volume. Some costs may exhibit both variable and fixed characteristics.
A variable cost changes with changes in volume. - 6Step-Fixed Costs/Semi-variable Fixed CostsExample of a mixed cost is a phone bill which contains monthly line rental (fixed) and cost of each call made (variable). This can be important in short-term decision such as pricing a special order and determining break-even points.
- 7What is the 'relevant range' in fixed costs?The range of activity or volume which the pattern of behaviour (fixed) still occurs. A cost needs to be assessed to see if it varies with volume or stays fixed.
- 8Outlay/OpportunityCostsOutlay costs are actual expenditures or payments and Opportunity Costs represent the costs of an alternative that has been forgone.
- 9Why is Opportunity Cost as important for analysis as Physical Cost?If you only focus on the physical amount paid, then important costs and potential benefits may be ignored. i.e purchasing an asset with cash instead of through a lease agreement.
- 10Relevant/Sunk CostsRelevant costs occur in the future. Some costs should not be included for decision making (irrelevant costs) because 1. they will be incurred regardless of choice made 2. have already been incurred and cannot be avoided. Sunk Costs should be excluded for decision making as they have already been incurred and are not recoverable.
- 11What could happen if Sunk Costs are incorrectly used in analysis?Can lead to incorrect decisions or even involved incurring even greater costs.
- 12What is an example of a Sunk Cost?Mine exploration. A mining company commits significant cost and capital outlay to conduct studies on the land, mineral content, extraction management and transport methods. When management decides whether to proceed with the project, the costs incurred during the feasibility study are considered 'sunk'.
- 13Value-added/Non-value-addedExamining each activity and determining whether it is adding value to the end product or service, helps manage value effectively. Those activities which add value should be improved and enhanced, while activities that do not add value should be reduced or eliminated.
- 14Committed/DiscretionarySome costs are committed/locked-in. i.e. contracts already in place which cannot be avoided (long term lease of land, property, plant & equipment). Some costs are committed because a particular design of an item may require certain materials which cannot be avoided. Discretionary cotss are those that can be avoided at the discretion of the manager, such as training, preventative maintenance, advertising and bonuses.
- 15Controllable/UncontrollableWhen evaluating and rewarding performance, assess only outcomes and costs that are under the control of particular individual or department. This is because the person or department under assessment cannot influence the uncontrollable costs.
- 16Why is it important to identify Controllable vs Uncontrollable Costs?Managers can be held accountable for performance in a responsibility accounting system.
- 17Why is it important to exclude Uncontrollable costs in performance evaluation?It may produce unjustified negative performance results that can have undesirable effect of causing demotivation and disillusionment.
- 18What is a problem encountered when considering 'Controllability'?1. Difficult to pinpoint controllability as there is often more than one factor affecting a particular cost/outcome. 2. Performance evaluation is often focussed on short term, which effect of some current actions may only be evident in the long term.
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- Professional Strategic Management Accounting (Module 1: Intro to Strategic Management) Karteikarten am Mod 1, Appendix: Accounting techniques for supporting operational management, erstellt von Sheree Rossi am 14/02/2016.
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