2 - Costing Flashcards
what is a cost object
anything for which cost data is desired
eg, products, product lines, jobs, customers or departments and divisions of a company
what is a cost unit
a unit of product or service in relation to which costs may be ascertained
should be appropriate to type of business
eg audit firm trying to cost a complete audit or one chargeable hour
what is a cost centre
a function or location for which costs are ascertained and related to cost units for control purposes
what are production/service cost centres
PRODUCTION = those actively involved in production process
SERVICE = provide a service or backup to production departments
what is cost classification
arrangement of costs into logical groups eg:
- classification by nature, eg materials/wages
- classification by function, eg admin or production
- classification by behaviour or responsibility
what are direct costs
costs which can be specifically identified with and allocated to a particular cost object
usually cost object will be a cost unit and therefore direct costs can be attributed in full to a particular unit of production
what are prime costs
the total of all direct production costs
what are direct materials/labour/expenses
include all material becoming part of the product, including packing material
direct labour is all basic hours or overtime on work, including altering the condition, conformation or composition
direct expenses = any expenses incurred on specific product OTHER THAN direct material cost and direct wages
what are indirect production costs
those costs which are incurred in the course of making a product/service but which cant be identified with a particular cost object (usually a cost unit)
examples of all materials/labour/expenses
DIRECT:
- labour = wages paid to manufacturing workers or hairdressers in a hair salon
- materials = incorporated into finished product eg wood used for table
- expenses = identifiable with each unit eg patent royalties payable to inventor of new item
INDIRECT:
- labour = wages of other staff eg supervisors, storekeepers and maintenance workers
- materials = used in production but not final product eg machine lubricants and spare parts
- expenses = not spent on individual units of production, eg rent, electricity and telephone
total cost is?
total cost = production costs + non production costs
what is historic cost
most organisations record assets at historical cost
historic cost = original cost to the organisation
what is economic value
assets can also be measured at economic value
economic value = the most someone is willing to give up in order to obtain the asset
how much a person is willing to pay for the asset tells us the economic value
what are environmental prevention costs
= costs incurred to prevent the production of waste that could cause damage to the environment
what are environmental appraisal costs
= costs incurred to assess whether a firms activities comply with environmental laws and standards
what are environmental internal failure costs
= costs incurred after waste has been produced but not discharged into the environment
what are environmental external failure costs
= costs incurred after waste has been produced and discharged into the environment, some of these costs may be paid by society as a whole
what is a relevant cost
(sometimes known as an avoidable cost) = a future, incremental cash flow arising as a direct consequence of a decision
(incremental = cost incurred from additional unit produced)
what is a future cost
- a decision is about the future and can’t alter what has already been done
- costs that have been incurred in the past are irrelevant to decision made ‘now’, eg past costs or sunk costs
- costs that have been incurred include not only costs that have already been paid, but also costs that have been committed
what are the importance of cash flows in a committed cost
- only cash flow info is required
- this means that costs or charges that don’t reflect additional cash spending should be ignored
what is a committed cost
= a future cash flow that will be incurred anyway, regardless of the decision taken now
what are the importance of an incrumental in a committed cost
= the increase (only) in costs and revenues that occur as a result of the decision
what is the opportunity cost
the benefit which would have been earned but has been given up by choosing one option instead of another
what are non cash flow expenses
eg depreciation, apportioned overheads
what are sunk costs
eg market research
what is the historic cost of material
if materials are used by a project then they will either:
1. need to be replaced, so the replacement cost is the cash flow, or:
2. they won’t so the cost is zero (or lost revenue if they could have been sold as scrap)
what is responsibility accounting
a system of accounting that segregates revenue and costs into areas of personal responsibility in order to monitor and assess the performance of each part of an organisation
what is a responsibility centre
a department or function whose performance is the direct responsibility of a specific manager
is either a cost centre, profit centre, investment centre or revenue centre
what are controllable and uncontrollable costs
CONTROLLABLE = cost which can be influenced by management decisions and actions
UNCONTROLLABLE = cost unaffected by management in a time span
what is a cost centre
= managers only have responsibility for controlling costs
what is a profit centre
= any section of an organisation to which both revenues and costs are assigned so that the profitability of the section may be measured
the manager of the profit centre has some say over revenues and costs
what is a revenue centre
= any section of an organisation to which revenues are assigned, before they are analysed further
what are investment centres
profit centres with additional responsibility for capital investment and possibly for financing
