1. Cost Behaviour And Classification Flashcards
What are the types of cost behaviour?
Variable costs
Fixed costs
Stepped fixed costs
Semi-variable costs
How do you split a semi-variable cost?
The High-Low method.
- Select the highest and lowest levels of activity
- Work out the variance
- Calculate the variable cost per unit
- Calculate the fixed cost
What are production costs?
All costs incurred producing units
What are non-production costs?
All costs not incurred in the factory
What is capital expenditure?
Expenditure on an item that will last for more than one year.
What is revenue expenditure?
Expenditure on an item that will last for less than one year.
What are production costs?
Direct costs (e.g. raw materials, wages of production workers) Indirect costs (e.g. admin costs, marketing and selling costs, distribution costs, finance costs)
What is the definition of material costs?
Anything physical that we buy for the business
What is the definition of labour costs?
The cost of paying for the time of staff.
What are expenses?
Anything that is not classed as material or labour
What is another word for direct costs?
Prime costs
What is another word for indirect costs?
Production overheads
What are cost centres?
Collecting points for costs (e.g location, function)
What are the types of factory’s cost centres?
Production cost centres
Service cost centres
What are direct costs?
Costs that can be directly attributed to each unit.
What are indirect costs?
Costs that have been incurred over a number of units
What are the steps for absorption costing?
1) allocate indirect costs to individual cost centres
2) apportionment of indirect costs to cost centres
3) re-apportion service cost centres to production cost centres
4) absorption of overheads into cost units
Overhead absorption rate =
Production overheads / activity level
What is the difference between absorption costing and marginal costing?
Absorption costing included all production overheads whereas marginal costing only includes variable overheads.
What does marginal costing look at?
Contribution per unit
What is the calculation for contribution per unit?
Contribution per unit = selling price - variable costs
What is marginal costing good for?
Short term decision making, it assumes that fixed costs would not be affected by our production over the next few weeks
What is activity based costing?
What the overheads of a particular cost centre are split into different categories of overheads and are then absorbed by a number of different absorption bases.
What are cost drivers?
Factors which cause the particular overhead to rise or fall
Why is ABC good?
It is more realistic and gives a more meaningful cost per unit based on the usage of the business resources. It identifies the causes of the indirect cost and absorbed overheads based on the activity level that drives cost.
