Chapter 1 - Cost Classification Flashcards
What are the 5 reasons that costing is important for a business?
- Setting selling prices
- Identifying ways to reduce costs
- Valuing items of inventory
- Setting costs targets
- Using cost targets to review and improve actual performance (variance analysis)
List the three categories costs can be classified by.
- Their nature
- Their function
- Their behaviour
What costs come under costs by nature?
Direct costs:
Direct material
Direct labour
Indirect costs/overheads:
Indirect material
Indirect labour
Other indirect costs
What costs come under costs by function?
Production costs
Non-production costs
If a cost is direct, what cost by function is it?
A production costs
If a cost is indirect, what cost by function is it?
It could be either a production or non-production cost.
What is a cost card?
A summary of the direct and indirect costs involved in producing a unit of a product. It can also include production and non-production costs.
What is a cost unit?
A product or service. Costs for this cost unit are allocated in a cost card. A cost unit might not be a single unit of production.
What is a production cost centre?
A division / department that incurs costs. They’re directly involved in the production of units.
What is a service cost centre?
A division or department where costs are incurred. It’s not directly involved in the production of units.
What is a revenue centre?
A department where the manager only controls revenue.
What is a profit centre?
A department where the manager controls costs and revenue.
What is an investment centre and how can they be judged?
A department responsible for the investment of capital. They can be judged on ROCE (return on capital employed)
What costs come under costs by behaviour?
Variable costs
Semi - variable costs
Fixed costs
Stepped fixed / mixed costs
What is the equation for calculating the total semi-variable cost?
Total cost = fixed cost + (variable cost per unit x production volume)
