Basic Concepts of Costing

What are the types of costs?

• Static costs

• Overhead costs

• Fixed costs, Variable costs, Semi-variable costs, Direct costs, Indirect costs, Opportunity costs

• Dynamic costs

Define fixed costs.

• Expenses that remain constant regardless of the level of production or sales.

• Expenses that are one-time payments

• Costs that are variable in nature

• Expenses that increase with production or sales

Explain variable costs.

• Variable costs are expenses that change in proportion to the activity of a business.

• Variable costs are fixed expenses in a business.

• Variable costs are not related to the level of production.

• Variable costs remain constant regardless of business activity.

Differentiate between direct costs and indirect costs.

• Direct costs are directly attributable to a specific cost object, while indirect costs are not directly attributable to a specific cost object.

• Direct costs are fixed costs, while indirect costs are variable costs.

• Direct costs are incurred in the production process, while indirect costs are marketing expenses.

• Direct costs are short-term expenses, while indirect costs are long-term investments.

What is the definition of marginal cost?

• Marginal cost is the total cost divided by the quantity produced

• Marginal cost is the fixed cost of production

• Marginal cost is the average cost of production

• The definition of marginal cost is the change in total cost that arises when the quantity produced changes by one unit.

Discuss the concept of opportunity cost.

• Opportunity cost is the cost of the chosen option only.

• Opportunity cost is the value of the next best alternative forgone when a decision is made.

• Opportunity cost is the same as sunk cost.

• Opportunity cost is the total cost of all available alternatives.

Describe sunk costs.

• Sunk costs are future expenses that can be avoided.

• Sunk costs are costs that have already been incurred and cannot be recovered.

• Sunk costs are costs that increase over time.

• Sunk costs are costs that are yet to be incurred.

How do you calculate total cost?

• Total Cost = Cost of Item 1 - Cost of Item 2

• Total Cost = Cost of Item 1 x Cost of Item 2

• Total Cost = Cost of Item 1 + Cost of Item 2 + ... + Cost of Item n

• Total Cost = Cost of Item 1 / Cost of Item 2

What is the formula for average cost?

• Average Cost = Total Cost / Quantity

• Average Cost = Total Cost - Quantity

• Average Cost = Total Cost * Quantity

• Average Cost = Total Cost + Quantity

Explain the concept of relevant costs.

• Relevant costs are fixed costs that do not change based on alternatives

• Irrelevant costs are costs that have no impact on decision-making

• Relevant costs only include historical costs

• Relevant costs are costs directly impacted by a decision and include future costs that change based on alternatives.