Chapter 1 Flashcards
Cost accounting
CGMA official terminology
Cost accounting is the ‘gathering of cost information and attachment to cost objects.
Establishment of budgets, standard costs and actual cost of operations process, activities, or products and the analysis of variance profitability or the social use of funds.’
CGMA cost transformation model
Cost-conscious culture – aiming to be a cost leader and drive, continuous improvement
Understanding, cost drivers – what impacts upon costs and reducing cost driver levels
Managing risks associated with cost conscious culture – what could stop the business achieving cost transformation, for example, loss of quality or increasing customer complaints.
Understanding true profitability of products and services – identify their cost drivers and how to allocate shared costs fairly
Maximising new products values– assess profitability, pre-production and build in design Flexibility to meet customer demands.
Considering environment footprint – consider possible costs such as waste disposal costs or reputational risk and associated costs .
Direct costs
Any cost directly incurred in the production of the product or service?
The total of all direct costs is known as the prime cost.
Indirect costs
(Overheads)
Any cost, which is not directly incurred in the production of the product or service
Cost objects
Any activity for which management may require a separate measurement of cost, e.g. the cost of a product or service or the cost of a department
Cost units
Units of production or service, for which of cost can be measured. Eg the cost of producing an i phone.
Composite cost units
Cost unit when more than one variable is taken into the measure,
For example, a transport company may use a tonne kilometre or hospital may use patient days. Each element incurs a cost. 
Cost centres
A type of responsibility centre
collection points for costs e.g. department, an object or a project
Marginal costing
Variable cost per unit
The amount it would cost to produce one more unit
Contribution
The difference between the revenue and the variable costs.
This contributes towards the fixed costs and profits of the organisation.
Absorption costing
Steps involved
Full costing
Step one – allocate direct costs to cost units
Step, two – allocate indirect costs to individual cost centres (both production and service cost centres)
Set three - apportion common costs such as rent between cost centres (using for example, floor area as the basis)
Step four – reapportion service department costs to production departments
Step five – absorb the overheads in each production department into the cost units (using the overhead absorption rate)
Advantages of marginal costing
Better for decision-making
Fix costs are treated as periods of costs, which is exactly what they are.
Profit depends upon sales (and not production) and hence enables clearer performance evaluation.
Disadvantages of marginal costing
Does not comply with financial reporting standards.
All costs must be split into the fixed and variable parts.
Fixed costs are being incurred and so cannot be ignored. 
Advantages of absorption costing
Complies with financial reporting standards.
Costs split into the fixed and variable parts
Fix costs are included in the product valuation, and so cannot be ignored.
Disadvantages of absorption costing
Not as good for decision-making.
Fixed costs are not treated as period costs which is what they are.
Profit figures can be inflated performance, depends on production, not sales
