Chapter 2 - Accounting Flashcards
What is direct material cost?
Direct material costs represent those material costs that can be specifically and exclusively identified with a particular cost object. For example, wood used in the manufacture of different types of furniture can be directly identified with each specific type of furniture such as chairs, tables and bookcases.
What is direct labour cost?
Direct labour costs are those labour costs that can be specifically and exclusively identified with a particular cost object. The direct labour cost in producing a product includes the cost of converting the raw materials into a product, such as the costs of the machine operatives engaged in the production process in the manufacture of televisions. The direct labour cost used to provide a service includes the labour costs in providing a service that can be specifically identified with an individual client or with a specific instance of service
What are indirect costs?
Indirect costs cannot be identified specifically and exclusively with a given cost object. They consist of indirect labour, materials and expenses. In a manufacturing organization where products are the cost object, the wages of all employees whose time cannot be identified with a specific product, represent indirect labour costs. Examples include the labour cost of staff employed in the maintenance and repair of production equipment and staff employed in the stores department.
What are overhead costs?
The term overheadsis widely used instead of indirect costs. In a manufacturing organization, overhead costs are categorized as manufacturing, administration or marketing (or selling) overheads. Manufacturing overheads include all the costs of manufacturing apart from direct labour and material costs.Examples of marketing costs include advertising, sales personnel salaries/commissions, warehousing and delivery transportation costs.
What are prime & conversion costs?
Prime cost consists of all direct manufacturing costs (i.e. it is the sum of direct material and direct labour costs). Conversion cost is the sum of direct labour and manufacturing overhead costs. It represents the cost of converting raw materials into finished products.
What is cost assignment about?
Direct costs can be traced easily and accurately to a cost object. For example, where products are the cost object, direct materials and labour used can be physically identified with the different products that an organization produces. In contrast,indirect costs cannot be traced to cost objects. Instead, an estimate must be made of the resources consumed by cost objects using cost allocations
What are product costs?
Product costsare those costs that are identified with goods purchased or produced for resale. In a manufacturing organization, they are costs that are attached to the product and that are included in the inventory valuation for finished goods or for partly completed goods (work in progress), until they are sold; they are then recorded as expenses and matched against sales for calculating profit.
What are period costs?
Period costs are those costs that are not specifically related to manufacturing or purchasing a product or providing a service that generates revenues. Therefore they are not included in the inventory valuation and as a result, are treated as expenses in the period in which they are incurred. Hence no attempt is made to attach period costs to products for inventory valuation purposes.
What are variable costs?
Variable costs vary in direct proportion to the volume of activity; that is, doubling the level of activity will double the total variable cost. Consequently, total variable costs are linear and unit variable cost is constant. Examples of variable costs in a manufacturing organization include direct materials, energy to operate the machines and sales commissions. Examples of variable costs in a merchandising company, such as a supermarket, include the purchase costs of all items that are sold
What are fixed costs?
Fixed costs remain constant over wide ranges of activity for a specified time period. They are not affected by changes in activity. Examples of fixed costs include depreciation of equipment, property taxes, insurance costs, supervisory salaries and leasing charges for cars used by the sales force
What are semi-variable costs?
Semi-variable costs (also known as mixed costs) include both a fixed and a variable component.
What are relevant and irrelevant costs and revenues?
Relevant costs and revenues are those future costs and revenues that will be changed by a decision, whereas irrelevant costs and revenues are those that will not be affected by the decision. Example: You are deciding whether to take public transport or your car. The car tax is irrelevant since it stays the same no matter your decision. Fuel costs are relevant because it changes if we decide to take our car or not.
What are sunk costs?
Sunk costs are the cost of resources already acquired where the total will be unaffected by the choice between various alternatives.
