Examines the different cost definitions and provides real-life examples to validate such descriptions.
Explores sunk, margin and opportunity costs in depth. Shows how to calculate such costs and determine success of investment.
o Cost: a sacrifice made to achieve a particular purpose
o Expense: the cost incurred when a resource is used for the purpose of generating revenue
o Product costs: associated with goods for sale and inventory (labour, raw materials,
overheads)
o Period costs: expensed during the time period in which they are incurred (sales
commission, rent, advertising, R&D)
Manufacturing costs
o Direct materials costs: materials easily traced to the finished product – physically
incorporated into final product (e.g. steel for a container)
o Direct labour costs: wages, salaries and fringe benefits of an employee who works
directly on the product
o Manufacturing overhead costs: all other manufacturing indirect costs
- Indirect materials: essential cost but cannot be assigned directly to product (cleaning
supplies for e.g.)
- Indirect labour: personnel who do not work directly on product (maintenance worker)
- Other (deprecation of equipment for e.g.) Overtime premiums and cost of idle time
(demand changes which affects employee work)
Cost object
o Cost object: an entity (product or service) to which a cost is assigned (e.g. chair)
- Direct cost: easily traced to a cost object (e.g. wood)
- Indirect: (e.g. electricity)
o Controllable costs: costs over which production manager has an influence (e.g. direct
materials)
o Uncontrollable: no influence (e.g. salary of a firm’s CEO)
o Variable: changes in direct proportion to a change in activity. Depend on quantity
consumed (e.g. phone bill)
o Fixed costs: cost constant. Incurred when there is no production
o Opportunity set: set of alternative actions available to decision maker
o Opportunity cost: benefits foregone by choosing one alternative from the opportunity set
rather than the best non-selective alternative
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