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Management Accounting > 2. Cost Classification (p23) > Flashcards

2. Cost Classification (p23) Flashcards

1
Q

What is responsibility accounting?

A

Identifying individual parts of a business that are the sole responsibility of a single manager.

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2
Q

What is a responsibility centre?

A

An individual part of a business whose manager has personal responsibility for its performance.

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3
Q

What is a cost centre?

A
  • A location, function, activity or equipment related to production or service where it’s costs are identified and recorded.
  • Only costs, not revenues, are recorded
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4
Q

What information do cost centre managers need?

A

Costs incurred and charged to their cost centres.

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5
Q

How is the performance of a cost centre manager determined?

A

The extent to which cost targets have been achieved.

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6
Q

What is a revenue centre?

A
  • Part of the organization that earns a sales revenue.
  • Only revenues, not costs, are recorded
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7
Q

Why must revenues be able to be traced back to individual revenue centres?

A

So that the performance of individual revenue centre managers can be assessed.

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8
Q

What is a profit centre?

A

Part of the organisation for which both costs incurred and revenues are identified.

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9
Q

Where are profit centres often found?

A

In large organisations with divisionalised structures and each division is treated as a profit centre.

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10
Q

What could a profit centre be made up of?

A

Several cost centres and revenue centres.

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11
Q

How is the performance of a profit centre manager measured?

A

By the profit made by the centre.

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12
Q

What is a profit centre manager responsible for?

A

Both the costs and revenues of the centre.
They must be able to plan and control both.

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13
Q

What is an investment centre?

A

Part of the organisation responsible for investment decisions, and decisions affecting costs and revenues.

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14
Q

What are investment centre managers responsible for?

A

The performance of capital employed and profits (costs and revenues)

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15
Q

How is the performance of investment centres measured?

A

By the return on capital employed (ROCE).

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16
Q

What is the return on capital employed?

A

Profit earned relative to capital invested.

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17
Q

What are cost objectives?

A

Any activity where associated costs are measured separately.
E.g.
- Cost of a product
- Cost of a service
- Cost of running a department
- Cost of running a regional office

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18
Q

What is a cost unit?

A

A unit of product or service from which costs are ascertained.
E.g.
- Cost per room (hotel)
- Cost per liter of paint
- Cost per patient (hospital)

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19
Q

What is a cost card?

A

Shows the breakdown of the different costs of producing output (output being either one unit or a planned level of production).

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20
Q

What are some types of costs that can make up a cost card?

A
  • Direct materials
  • Direct labour
  • Direct expenses
  • Prime cost (total direct costs)
  • Variable production overheads
  • Fixed production overheads
  • Non-production overheads
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21
Q

What cost summaries might managers need?

A
  • Cost for a product (Cost unit or cost object)
  • Cost for use in the preparation of external financial reports
  • Cost for a particular department (cost centre)
  • Costs to be used in decision making
  • Costs useful for planning and control
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22
Q

What 4 ways might costs be classified?

A
  • Element
  • Nature
  • Function
  • Behaviour
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23
Q

What does is mean to classify cost costs by element?

A

Whether they relate to material, labour or expenses.

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24
Q

What does is mean to classify cost costs by nature?

A

How they relate to production.

(Are they directly or indirectly involved in the production of the product/service)

Useful for cost accounting.

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25
Q

What does is mean to classify cost costs by function?

A

Whether they are production or non-production costs.

Useful for financial accounts.

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26
Q

What does is mean to classify cost costs by behaviour?

A

How costs change in relation to levels of output or activity.

Useful for budgeting and decision making.

27
Q

What are material costs?

A

The cost of all materials purchased for production or non-production activities.

(E.g. raw materials, components, cleaning materials, maintenance materials, stationary)

28
Q

What are labour costs?

A

Staff costs relating to employees on the payroll of the organisation.

29
Q

What are expenses? (classification by element)

A

All costs that are not materials or labour.

(E.g. rent, telephone, subcontractors, depreciation)

30
Q

What are direct costs?

A

Costs that can be directly identified with a specific cost unit or cost centre.

31
Q

What are the three main types of direct costs?

A
  • Direct materials
  • Direct labour
  • Direct expenses
32
Q

What are prime costs?

A

The total of all direct costs.

33
Q

What are indirect costs?

A

Costs that can’t be directly identified with a specific cost unit or centre.

34
Q

What are overheads?

A

The total of all indirect costs.

35
Q

What are production costs?

A

Costs that relate to manufacture of a product or provision of a service.

Included in valuation of inventory

36
Q

What are some examples of production costs?

A
  • Direct materials
  • Direct labour
  • Direct expenses
  • Variable production overheads
  • Fixed production overheads
37
Q

What are non-production costs?

A

Costs not directly associated with the production of business output.

Not included in valuation of inventory

38
Q

What are some examples of non-production costs?

A
  • Administrative costs
  • Selling costs
  • Distribution costs
  • Finance costs
39
Q

Where are production and non-production costs charged to on the P&L?

A

Production
Cost of sales

Non-production
Expenses

40
Q

What are the four ways in which you can classify costs by behaviour?

A
  • Variable costs
  • Fixed costs
  • Stepped fixed costs
  • Semi-variable costs
41
Q

What are variable costs?

A

Costs that vary in direct proportion to the level of activity.

  • Changes in total
  • Fixed per unit
42
Q

How does the variable cost per unit change as activity increases?

A

It remains the same.

43
Q

When might variable costs not change in direct proportion to activity?

A

If discounts are applied to high volume purchases.

44
Q

What are fixed costs?

A

Costs that remain constant within certain activity levels for an accounting period.

  • Constant in total
  • Change per unit
45
Q

How does the fixed cost per unit change as activity level increases?

A

It decreases logarithmically.

46
Q

What are stepped fixed costs?

A

A cost that is only fixed within a certain level of activity.

(Once a certain level of activity is reached, a new fixed cost becomes relevant)
- Constant in total within a certain range
- Changes per unit

47
Q

What are semi-variable costs?

A

A cost that contains a mix of fixed and variable costs.

(Eg telephone bills have fixed line rental plus cost per call)
- Changes in total
- Changes per unit

48
Q

What is the high low method used for?

A

Separating a semi-variable cost into an approximation of the variable cost per unit and the total fixed cost.

49
Q

What is step 1 of the high low method?

A

Select the highest and lowest activity levels, and their associated costs.

50
Q

What is step 2 of the high low method?

A

Calculate the variable cost per unit:

VC per unit = (cost at high activity - cost at low activity) / (high level of activity - low level of activity)

51
Q

What is step 3 of the high low method?

A

Calculate the fixed cost by substitution, using either high or low activity level:

Fixed cost = total cost at activity level - (variable cost per unit * activity level)

52
Q

What is step 4 of the high low method? (Final)

A

Use total fixed cost and variable cost per unit to calculate estimated cost at different activity levels:

Total costs = total fixed costs + (variable cost per unit * activity level)

53
Q

How would you change the high low method to work with stepped fixed costs?

A
  • Choose the two activity levels where the fixed costs remain unchanged
  • Recalculate fixed costs when calculating the total cost for a new activity level.
54
Q

How would you change the high low method to work with changes in the variable cost per unit?

A

Choose two activity levels where the variable cost per unit remain unchanged.

55
Q

What formula can be applied to the cost equations?

A

Straight line: y = a + bx

  • a is the intercept (fixed cost per period)
  • b is the gradient (variable cost per unit)
  • x is the independent variable (activity level)
  • y is dependent on the activity level (total cost = fixed cost + variable cost)
56
Q

What are cost codes?

A

System of symbols to apply to a classified set of items. Helps entry into records, collation and analysis

E.g.

  • Allocate a code for the cost centre
  • Add digits for the precise type of cost (generic/functional code)
  • Add more digits to identify the specific item of cost (specific code)
57
Q

What are the main types of coding system?

A
  • Sequential code
  • Block code
  • Hierarchical code
  • Significant digit code
  • Faceted code
  • Mnemonic code
58
Q

What is a sequential code?

A
  • Follows numerical or alphabetical sequence
  • E.g. 001 = motor expense, 002 = electricity … 999 = etc.
59
Q

What is a block code?

A
  • Categorises sequential codes together
  • E.g. 0000 = Expenses, 1000 = Revenue, 2000 = current assets etc.
  • Allows classification of 1,000 different things per block.
60
Q

What is hierarchical code?

A
  • Each digit represents a classification
  • The digits represent smaller subsets as you go from left to right

E.g.
- 1 = Revenue
- 1.1 = Revenue in UK
- 1.1.1 = Revenue in UK from laptop sales
- 1.2.1 = Revenue in USA from laptop sales
Etc.

61
Q

What is significant digit code?

A
  • Individual digits and letters are used to represent features of the item

E.g.
- 2000 = Paper file dividers
- 2010 = 10 pack of paper file dividers
- 2020 = 20 pack of paper file dividers
Etc.

62
Q

What is faceted code?

A
  • Broken down into a number of fields (facets) each signifying a unit of information.
  • More complex but allows for more subdivisions and codes.

E.g.
Region
- Europe = 01
- Asia = 02
- USA = 03
Department
- Sales = 01
- Production = 02
- Admin = 03
Expense
- Salaries = 0244
- National insurance = 0245
- Pension contribution = 0246
Etc.

03020244 would be an expense for salaries in the production department of the USA.

63
Q

What is mnemonic code?

A
  • Aids the memory or understanding
  • Usually alphabetical rather than numerical.
  • Difficult to use sub-categories and doesn’t do well with a large number of categories.

E.g.
- NCA = Non-current assets
- EXP = Expenses
- REV = Revenue
Etc.

Management Accounting (18 decks)

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