Accounting 1 Flashcards
What is cost
Def:
Refers to the monetary value or resources used or spend to acquire goods or services.
Used to:
Determine price, profit, financial performance within a business.
What is a cost object
A cost object is any item for which costs are being separately measured.
Within every cost object there are cost items: For ex: department = cost object
Cost items = travel, rent, insurance, wages etc.
Cost items are allocated to cost object
Ex:
A department is a cost object, then all relevant costs like salaries, supplies, and utilities (cost items) are aggregated to determine the total cost of operating that department.
What is absorption costing and what is it good for?
In absorption costing, all manufacturing costs, both fixed, variable, direct and indirect costs are absorbed by the units produced.
Captures all costs related to the production (manufacturing) of a product = Full costing
This is by law - taking this to the bank.
Direct cost of labor (DL) + Direct cost of materials (DM) + Total manufacturing overhead (MOH) (fixed and + variable)
Does not provide much information about cost behaviour.
What is Variable costing and what is it good for?
A manger can only plan and control variable cost if the manager is aware of the Cost driver!! - see lecture 2
Captures only direct costs related to the production (manufacturing) of a product.
Only cost that is associated with the production = Marginal costing
Fixed manufacturing overhead is NOT included
This is because indirect cost is not relevant for the production ex: taxes, utilities, electricity etc. These will be there no matter how much we sell and produce!
Fixed MOH (indirect in this case) = trated as period expense AND are recorded in the income statement (the period they occur).
If we sell less a period, then the profit can be less, than if we used the absorption method.
What is MOH?
Cost that cannot be traced to a specific unit
Ex: Indirect labor production such as truck drivers, cleaners etc.
What is depreciation?
The value at the time it is bought and what is the value now? Because is loses value over time.
This is a sunk cost
What is profit in absorption costing and variable costing? And why use each?
Profit in absorption cost:
Gross margin = Sales – total manufacturing costs (both fixed and variable costs) (can cover all your cost)
Profit in variable costing:
Contribution margin = Sales – Manufacturing costs (only variable costs
Using absorption is by law - taking it to the bank
Variable is for decision making. Here we can the control the cost. Managers can use this costing method to learn about cost behaviours and its impact on their operations. The blamegame
Why is cost classification essential?
Cost classification is an essential concept in accounting and finance, allowing businesses to organize and analyze expenses in ways that facilitate decision-making, budgeting, and financial reporting.
This is the first thing you do! If wrong = wrong result. Ex: set a variable cost as fixed = wrong result in ex absorption vs variable costing.
How do you classify a cost
Things to classify cost:
1. Nature or element of the cost = in what way is the cost directly accountable to the cost object.
2. Behavior of the cost
3. Classification based on function of the cost
4. Classification based on the traceability of the cost.
5. Classification based on the relevance of the cost to decision making.
6. Classification based on the ability to control the cost.
7. Classification based on the normalcy of the cost.
8. Classification based on the timeframe of the cost
9. Classification based on the ability to measure the cost.
uring performance).
What is a financiel statement?
Income statements is used in manufacturing and merchandising companies.
Why is an income statement relevant?
Gives an overview of
- Performance evaluation
- Cost management
- Decision making
- Supporting internal control
What are the two ways of doing an income statement?
You can do it two ways:
Absorption costing (by law):
Does not distinguish between cost behavior
Variable costing (decision!)
Contribution approach - istinguishes between cost behaviors = easy to analyse impact of cost behavior
Managers can use this costing method to learn about cost behaviours and its impact on their operations
