20.4. Importance of Cost Classification

Try these first

1. 1.

   What is a direct cost?

   Hint

   Think about what items are necessary to produce a product.

2. 2.

   Why is budgeting important?

   Hint

   Consider the implications of overspending.

3. 3.

   What is a controllable cost?

   • A cost that cannot be influenced by management
   • A cost that can be affected by management actions
   • A cost that is fixed

   Hint

   Consider what types of expenses are flexible versus those are set.

4. 4.

   True or False: All costs in a business can be classified as either fixed or variable.

   • True
   • False

   Hint

   Think about other forms of classification.

5. 5.

   A manufacturing company wants to analyze its production costs. Identify the potential fixed and variable costs associated with producing one unit of its leading product.

   Hint

   Think about what costs continue even if production stops.

6. 6.

   A software development firm is planning to create a new application. What types of costs should they classify, and how will this classification impact their pricing strategy?

   Hint

   Consider how software development projects typically incur different types of costs throughout their lifecycle.