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What are the purposes of Costs?
- Preparation of external financial statements
- Short-term planning (e.g., budgeting, C-V-P analysis)
- Short-term decision-making (e.g., capacity use)
- Long-term decision making (e.g., capacity acquisition, normal product pricing)
- Control (feedback)
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What is the Cost Classification for the purpose of preparing external financial statements?
Functional Classification - Product vs. Period Costs
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What is the cost classification for the purpose of short-term planning?
- Behavior
- Variable, Fixed, Mixed, Semi-Fixed Costs
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What is the cost classification for the purpose of short-term decision making?
Opportunity costs vs. Sunk costs vs. Incremental costs
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What is the cost classification for the purpose of long-term decision making?
Activity-cost hierarchy
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What is the cost classification for the purpose of control?
Controllable vs. Non-controllable costs
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What are the two types of Costs in Financial Accounting?
- Product Costs - Manufacturing, Inventoriable
- Period Costs - Non-manufacturing, Operating Expenses
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What is the Accounting Treatment of Product Costs as they move forward in time?
Recorded as an Asset in Inventory and when sold reported as CGS Expense
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What is the Accounting Treatment of Period Costs as they move forward in time?
Period costs are expensed in the same year in which they are incurred.
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What is meant by the term "cost behavior"?
It describes how a cost changes in relation to some cost driver.
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What are the three considerations in classifying costs by "behavior"?
- Activity variable(s)/Cost driver(s)
- Relevant range
- Time horizon
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What is a Cost Driver?
The activity variable(s) that affects the increase or decrease of a cost.
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What is the Relevant Range consideration when classifying costs by "behavior"?
The typical range in which costs fluctuate.
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What is the Time Horizon consideration when classifying costs by "behavior"?
- The start, end, and length of time a cost's behavior is observed.
- Longer time horizon allows more costs to be considered variable.
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What are Variable Costs?
Costs that fluctuate based on changes in a cost driver.
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What are Fixed Costs?
- Costs that are not affected by any independent variable(s) or cost drivers.
- Capacity-related costs
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What are Semi-Variable (Mixed) Costs?
A combination of Fixed and Variable costs.
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What are Semi-Fixed Costs?
- Costs that remain constant within a narrow range of activity.
- Step variable cost
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What is Cost Plus Pricing?
Organizations set a price that is an increment of tits product's cost.
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What is Target Costing?
A tool used to focus efforts in product and process design on developing a product that has a good profit potential in view of market requirements.
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How is Variable Cost calculated?
Variable cost = Variable cost per unit of the cost driver x Cost driver units
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What are Incremental Costs?
The cost of the next unit of production and is similar to the economist's notion of marginal cost.
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What is a Sunk Cost?
A cost that results from a previous commitment and cannot be recovered.
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What is the Sunk Cost Effect?
A maladaptive economic behavior that is manifested in greater tendency to continue an endeavor once an investment in money, effort, or time has been made.
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What is a Relevant Cost?
A cost that will change as a result of some decision.
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What is an Opportunity Cost?
The maximum value forgone when a course of action is chosen.
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What is an Avoidable Cost?
A cost that can be avoided by undertaking some course of action.
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What is a Make-Or-Buy Decision?
- Deciding whether to contract out for a product or service.
- e.g., Internal costs avoided vs. external costs incurred
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What are the three types of Manufacturing Costs?
- Direct Materials
- Direct Labor
- Manufacturing Overhead
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What are Direct Materials Costs?
Materials that can be traced easily to a unit of output and are of significant economic consequence to the final product.
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What are Direct Labor Costs?
Labor costs that can be traced easily to the creation of a unit of output.
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What are Manufacturing Overhead Costs?
All costs incurred by a manufacturing facility that are not direct materials costs or direct labor costs.
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