4. Cost classification

Question 1

Define:

a) a cost object
b) a cost unit
c) a cost centre
d) a cost card

Answer 1

a) Umbrella term for any activity in which costs can be incurred
b) A unit of product or service in relation to which costs are ascertained.
c) a production or service location
d) shows the breakdown of a cost or service

Question 2

In which ways can we classify cost? Explain them (4)

Answer 2

• Element: material/labour/expense
• Nature: direct/indirect
• Behaviour: variable/fixed/semi-variable/stepped
• Function: production/non-production costs

Question 3

How do we use the high/low method to account for

a) semi-variable costs
b) fixed costs
c) variable costs per unit

Answer 3

a)

1) pick highest and lowest output
2) change in cost/change in output
3) formula is TC = FC + (VC X O)

b and c) the same but use two levels of output where variable cost is the same

Question 4

What is the cost equation? Explain each element.

Answer 4

y = a + bx

y = dependent variable (total activity)
a = fixed cost
b = variable cost
x = independent variable (output)

Question 5

Explain the three different types of codes.

Explain the six different types of coding systems.

Answer 5

CODES:
Cost codes: by cost centre
Generic/functional codes: by category
Specific codes: each item different

CODING SYSTEMS:
Sequential codes: ABC, 123
Block code, 000, 100, 200
Hierarchical code: each subcategory has further decimal point
Faceted code: broken down into many components
Mnemonic code: abbreviation or play on words.