What is Cost?
the amount of resources, usually measured in monetary terms, sacrificed to achieve a particular objective
Relevant and irrelevant costs
● Relevant costs must:
– relate to the objective of the business;
– differ from one possible decision outcome to the next.
● Relevant costs therefore include:
– opportunity costs (the loss of other alternatives when one alternative is chosen);
– differential future outlay costs (any expenditure made to support an activity).
● Irrelevant costs therefore include:
– all past (or sunk) costs (sometimes called a retrospective cost, refers to an investment already incurred that can’t be recovered);
– all committed costs;
– non-differential outlay costs.
There are many costs involved in running business, some of them vary – VARIABLE COSTS and others remain more or less the same in a period of time – FIXED COSTS.
Try to match the phrases below with the definitions:
PRICE FIXED VARIABLE CENTRE ANALYSIS MANUFACTURING OPERATING LABOUR SELLING SALES
1. Expenses which are not changed by the volume of production (eg. Rent, heating) …………… COSTS
2. Expenses which increase with bigger production (e.g. labour, raw materials) ………………….COSTS
3. All costs directly related to production ………………… COSTS
4. All costs directly related to making someone buy a product ………………..COSTS
5. The cost of employing workers …………….COSTS
6. The cost of running of a company or business ……………… COSTS
7. Selling at a price which is equal to the cost of production COST………………
8. The study of all probable costs associated with a product COST………………
9. A business treated independently for accounting, though in a chain or a subsidiary COST………………
10. The total costs for all products sold COST OF …………………
KEY
- FIXED 2. VARIABLE 3. MANUFACTURING 4. SELLING 5. LABOUR 6. OPERATING 7. PRICE 8. ANALYSIS 9. CENTRE 10. SALES
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