2- Cost Concepts, Behaviour and Terminology Flashcards
What is a cost?
A cost is a measure of resources used or
given up to achieve a stated purpose
A cost objective is …
A cost object is ….
- any activity for which a
separate measurement of costs is required - anything for which cost data are
desired – including products, product lines,
customers, jobs and organizational subunits
x5 Cost Objectives and their Classifications [x2 for each objective]
- Assigning costs to cost objects - traceability (direct or
indirect) - Financial reporting - inventoriable or expensed
(product or period) - Predicting cost behaviour in response to changes in
activity (fixed or variable) - Assessing performance (controllable or
uncontrollable) - Making decisions (differential, sunk, opportunity)
Compare Retailing and Manufacturing:
- Activity
- Inventory
- Activity:
R- Buy finished goods, Sell finished goods
M- Buy raw materials, Produce and sell finished goods - Inventory:
R- Only 1 type of inventory (merchandise inventory)
M- 3 types of inventory: raw material, work in progress,
finished goods
Where is the costs of unsold goods reported?
Where is the cost of goods sold reported?
The cost of unsold goods is reported on the balance sheet
▪ The cost of goods sold is reported on the profit and loss account/income
statement
what are product costs?
The costs a company assigns to units produced
Manufacturing Costs? x3
Direct Labour
Direct Materials
Manufacturing Overheads
Def direct materials and eg
Those materials that become an integral part of the product and that can be
conveniently traced directly to it
Example: A radio installed in a car
Def Direct labour and eg
Those labour costs that can be easily traced to individual units of product
Example: Wages paid to car assembly workers
def manufacturing overheads?
x2 types, 2 egs for each
Manufacturing costs that cannot be traced directly to specific units produced
Examples:
1. Indirect labour:
Wages paid to employees who are not directly involved in production work
Examples: maintenance workers, cleaners and security guards
2. indirect materials
Materials used to support the production process
Examples: lubricants and cleaning supplies used in the
car assembly plant
Classification of Costs:
What is Classified as Prime costs and what is classified as conversion costs?
Prime Costs: direct materials and direct labour
Conversion Costs: direct labour and manufacturing overheads
Give examples of non-manufacturing costs [x2 + explanation{
Marketing and selling costs . . • Costs necessary to get the order and deliver the product Administrative costs . . . • All executive, organisational and clerical costs
Financial reporting requires classification into [2]
Product and Period costs
Product Costs include
What are Sold goods recorded on? What are they recorded as?
What are Stocks of goods recorded on?
Direct Materials, direct labour, manufacturing overhead
Under ‘Cost of Goods Sold’ on the Income Statement
What are period costs reported on? What do they come under/are they classified as?
Period costs are not included in product costs.
They are expensed on the profit statement under expenses
What is under the current assets section of the balance sheet for a retailer?
Retailer Current Assets •Cash •Debtors •Prepaid Expenses •Merchandise Stock
What is under the current assets section of the balance sheet for a manufacturer?
Current Assets
➢ Cash
➢ Debtors
➢ Prepaid Expenses
➢ Stock:
Raw Materials
Work in Progress
Finished GoodsHow does Cost of goods sold for manufacturers differ only slightly from cost of goods sold for retailers?
For Retailers, under ‘costs of goods sold’, it will be stated as ‘purchases’. For Manufacturers, it will be stated as ‘costs of goods manufactured’
Where do Direct Material, direct labour and manufacturing overheads come on Balance sheet and Income statement respectively?
Balance sheet:
Direct materials = raw materials
Direct labour and manufacturing overheads = work in progess,
Income statement:
All under finished goods (not recorded on income statement unless finished)
Product costs go into the ____ sheet as
____ and only go through the ____ statement when
the product is ___
• Period costs go on the incomce statement in the
period in which they are _____
(not necessarily when ___ ___ ____!)
balance
assets
incomce
sold
Incurred
they are paid
Classifying cost behaviour involves identifying …
fixed and variable costs
Behaviour of variable costs in total and per unit?
In Total: Total variable cost changes Variable cost per unit remains
Per Unit: Variable as activity level changes the same over wide ranges of activity
Examples of variable costs x4
1 - x1
2- x3
3- x2
4- x2
Retailers: Cost of Goods Sold
Manufacturers: Direct Material, direct labour, and variable manufacturing overhead
Retailers and Manufacturers: Sales commissions and
shipping costs
Service Organisations: Supplies and travel
Behaviour of fixed costs in total and per unit?
The fixed cost remains the same even when the activity level changes
The fixed cost per unit goes down as activity goes up
Examples of fixed costs x4
Retailers, manufacturers, and service
organisations
Taxes, insurance, sales salaries depreciation, advertising
What does relevant range refer to in fixed costs?
Seldom is a fixed cost fixed over all levels of activity • The relevant range is the volume range within which actual operations are likely to occur
What are ‘committed’ fixed costs?
Long-term, cannot be reduced in the short term Examples: Depreciation on Buildings and Equipment
What are ‘discretionary’ fixed costs?
May be altered in the short-term by current managerial decisions Examples: Advertising and Research and Development
What are differential costs and revs?
Costs and revenues that differ among alternatives
What is a sunk cost?
Should it be account for when making economic decisions?
Opp cost
Sunk costs cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions
