Chaper 1 - Cost classification & behaviour Flashcards
COST BEHAVIOURS
•Fixed - does not change with the activity of the business.
Example: Rent or insurance
•Stepped - remains fixed until a certain activity level.
Example: Supervisor costs
•Variable - cost per unit remains the same.
Example: Direct material or direct labour
•Semi Variable - Fixed & variable cost combined.
Example: Factory electricity
^Uses the high-low method
VARIABLE COST
•Costs that vary (i.e. rise and fall) with output (e.g. materials, labour cost per hour)
Example: Direct materials or direct labour (the workers)
•Cost per unit will remain the same
FIXED COSTS
Are costs that will not vary with output. These are often referred to as fixed overheads (e.g. rent and rates)
Remains at a constant level regardless of the activity level.
STEPPED FIXED COSTS
Are costs that remain fixed for a certain level of output and then increase until a further level of output is reached. They then become fixed again until output levels reach another point, then increase again (e.g. supervisors’ salary and rent)
Example: A factory - when it’s reached it’s full capacity holding, the business will need to buy another property/larger factory.
SEMI-VARIABLE (MIXED) COSTS
Are costs which are part fixed and part variable, and are therefore partly affected by changes in the level of activity (e.g. a telephone bill has a fixed element related to line charges, and a variable element relating to usage).
^ Before a call is even made, there’s a cost incurred for having the landline.
HIGH LOW METHOD FOR SEMI-VARIABLE COSTS
Step 1. Select the highest and lowest activity level and their costs.
Step 2. Find the difference in the output and costs
^ Always cost - output
Step 3. Calculate the variable cost per unit.
^ Difference in cost / difference in units
Step 4. Calculate the fixed cost
^ Total cost - (VCPU x units)
CAPITAL EXPENDITURE
• The purchase of non-current assets.
Example: buying a machine
• The improvement of the earning capability of non-current assets.
Example: upgrading a machine
REVENUE EXPENDITURE
• The purchase of goods for resale.
• The maintenance of the existing earning capacity of non-current assets.
Example: electricity usage on a machine
• Expenditure incurred on conducting the business.
Example: standard expenses
COST CLASSIFICATION BY FUNTION
Total Cost
• Production cost - costs associated with the production of goods and services from the supply of raw materials to the warehousing of finished goods.
• Non-production costs - all other costs incurred in the business.
Example: Office costs
PRODUCTION COSTS
- Materials - cost of materials that are used in making the product or service.
- Labour - cost of the workforce used in making the product.
• Overheads (cost/expense) - cost of any overheads required to support the production process.
A necessary cost to keep production going.
Example: electricity bill or factory rent
NON-PRODUCTION COSTS
• Administration - all other costs incurred in managing the organisation.
Example: accounts staff salaries
• Marketing - all costs incurred in promoting and retaining customers.
Example: advertising or sales staff salaries, as they are there to promote the business and sell a product.
• Distribution - all costs incurred in making the packed product ready for despatch and delivery to the customer.
Example: warehouse or delivery driver salaries or van fuel
• Finance - all costs incurred to finance the business.
^ not always relating to the finance department.
Example: interest charges on loan amount borrowings (if the business took out a loan).
DIRECT COSTS
Are costs which can be specifically identified with, and allocated to, a single cost unit.
- They are often variable costs (e.g. materials cost per unit)
- Can sometimes be fixed (e.g. tool hire)
PRIME COSTS
Are the totals of all direct costs in manufacturing a product/providing a service
INDIRECT COSTS
Are costs which are incurred in the course of making a product/service, but which cannot be identified with a particular cost unit.
^ Normally referred to as overheads
-Mainly fixed costs, but can be variable such as oil for machinery.
COST CENTRE
Are areas of the business where costs are incurred, such as factory or canteen.
PRODUCTION COST CENTRES
Are directly involved in the production or provision of the cost unit.
E.g. the assembly department
SERVICE COST CENTRES
Are not involved in the production or provision of cost units, but are needed to support or service the production cost centers.
E.g. the canteen
PROFIT CENTRE
Are accountable for costs and revenues
REVENUE CENTRE
Are accountable for revenue only
INVESTMENT CENTRE
Are profit centers with additional responsibilities for the capital investment.
ABSORPTION COSTING
All production costs are included in the costing of a cost unit.
E.g. direct materials/labour, variable production overheads & fixed production overheads
MARGINAL COSTING
Only the variable costs of production are included in the cost per unit. The fixed overheads are treated as period costs and not as part of the cost unit.
Cost unit would consist of direct materials/labour & variable production overheads.
The fixed overheads are charged to the SOPL as an expense for the period.
ACTIVITY BASED COSTING
Is a method of aborption costing which uses more sophisticated methods of allocating overheads to cost units.
It considers the activities that cause the overhead to be incurred and the factors that give rise to the costs (cost driver)
Overhead absorption rate
Is an estimated amount of fixed production overhead used to produce one cost unit
COST POOLS
Are breakdowns of total overheads into different categories depending on the activity that has generated the cost.
COST DRIVERS
Are factors that drive a change in the usage of an activity.
