Chapter 1: Management Accounting - The Basics Flashcards
Useful purposes of costing
5 purposes
Setting Selling Prices
Valuing Items of inventory
Identifying ways to reduce costs
Setting cost targets for production staff and managers
Using the cost targets set to review and improve actual performance
Classifying costs
3 ways
By:
Nature
Function
Behaviour
Classifying costs by nature - Direct Cost
Direct costs - identified with the production of a single unit in business. They are traceable costs as they can be traced to the production of a single unit.
Total of direct costs is the prime cost
Direct costs
Direct Material - physical substance
particular quantity of material is required for the production of a single unit then this cost can be traced to each unit.
eg. building a car requires four wheels
Direct Labour - If production staff take a certain amount of time working on each unit then their wage for that period of time can be traced to the individual unit
eg. production workers takes two hours to fix wheels onto each car then the cost of the wage paid over those two hours can be traced to specific units
Classifying costs by nature - Indirect costs (or overheads)
Many costs cannot be traced to specific units being produced.
They can be thought of being shared over many units being produced at the same time.
Indirect costs (or overheads)
Examples
indirect material, indirect labour
Examples: Factory Rent, electricity to run machinery, admin expenses
Indirect material - sometimes business purchases materials which cannot be traced to individual units of production such as lightbulbs for the factory
Indirect labour - some staff will not work on individuals units and their salaries would therefore be indirect costs, include supervisors in the factory
Classifying costs by function
Area of business
Production costs
Non-production costs
Relationship between nature and function of costs
Direct costs are always production costs
Indirect costs can be production costs
Indirect costs can be non-production costs
Classifying costs by behaviour
‘behaviour’ of a cost relates to how it affected by changes in the volume of production
Variable costs
Total variable costs = variable costs per unit x budgeted production volume
Fixed costs
Do not vary with volume of production
Stepped fixed costs (or semi-fixed costs)
Some costs are fixed over certain levels of activity but will increase once a certain point is reached.
Semi-variable costs (mixed costs)
Both fixed and variable elements
such as telephone
Fixed line rental, variable call charges
Total cost = fixed cost + (variable cost per unit x production volume)
Semi-variable costs - High-low method
Step 1: Select highest and lowest levels of activity
Step 2: Work out diff in cost and output levels
Step 3: Calculate variable cost per unit
Step 4: Fixed cost using formula
Dealing with semi-variable costs with stepped costs
Work out the high-low method both below the step or both above the step
