Chapter 16: Cost concepts, Cost behaviour and CVP Analysis

Organisational Framework
• Organisations can be classified into one of three categories:
1) Manufacturing: produce goods by converting raw materials into a physical product through the use of labour and capital inputs. Usually sell G to merchandising or other manufacturing firms
2) Merchandising: Buy goods already made and then sell them to consumers or other merchandising firms. Selling directly to consumers (retailers) selling to other merchandising firms (wholesalers)
3) Service: provide a service to customers. They deal with intangible products and many service organisations are not profit making e.g. ATO, Red Cross
• Manufacturing firms often require a greater quantity and variety of cost information because they are involved in production processes
Basic Cost Concepts
• Cost is the cash or cash equivalent value sacrificed for g+s that are expected to bring a current or future benefit to the organisation
• Expired costs are called expenses
• Costs that do not expire in a given period are assets
• An opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another
• A differential cost is the amount by which a cost differs between two alternatives
• An out of pocket cost is a cost that involves a current cash outlay e.g. office supplies
• A sunk cost is a cost for which an outlay has already been made e.g. depreciation
• Controllable costs are those costs heavily influenced by a manager-in effect, costs a manager is authorised to incur
• A non-controllable costs is a cost over which the manager has no significant influence
• Direct costs are those costs that are traceable to a cost object
• A cost object is any item or activity to which costs are assigned
• Indirect costs are those costs that are common to several cost objects and accordingly, are