Chapter 2 : Cost classification and cost behaviour Flashcards
Capital expenditure includes:
Purchase of non-current assets
Improvement of the earning capability of non-current assets
Revenue expenditure includes:
Purchase of goods for resale
Maintenance of the existing earning capability of non-current assets
Expenditure incurred in conducting the business
Is the following Capital or revenue expenditure:
Extension to a building, Repairs to a building or machine, legal costs of buying a new factory, installation of new machinery, redecorating offices
Extension to a building - capital expenditure
repairs to a building or machine - revenue expenditure
legal costs of buying a new factory - capital expenditure
installation of new machinery - capital expenditure
redecorating offices - revenue expenditure
Production costs examples
materials and labour
maintenance costs
supervision of work force
non-production costs - selling an distribution costs
Advertising
delivery costs
staff salaries
non-production costs - financing costs
all expenses associated with raising money to finance the business
Example - loan or overdraft
Direct materials
materials incorporated into the finished product e.g. wood used in the construction of a table
indirect materials
materials used in the production process but not incorporated into the product
direct labour
wages paid to those workers who make products in a manufacturing business e.g. machine operators
indirect labour
wages and salaries to other staff e.g. supervisors, storekeepers and maintenance workers
Direct expenses
expenses that are identifiable with each unit of production e.g. patent royalties payable
indirect expenses
expenses that are not spent on individual units of production e.g. rates, electricity and telephone
Prime costs formula
Direct materials + direct labour + direct expenses
Overheads formula
indirect materials + indirect labour + indirect expenses
Fixed costs
total costs which remain the same as output increases
variable costs
total costs increases as output increases
Semi-variable costs
costs that contain elements of bopth fixed and variable costs also known as mixed costs
stepped costs
costs remain the same up to a certain level of activity and then jump.
Total Fixed cost formula
fixed cost per unit x number of units
Total Variable cost formula
Variable cost per unit x number of units
Total semi-variable cost formula
Fixed element + (variable cost per unit x number of units)
or the high - low method
High-Low method
(Highest total cost - lowest total costs) / (highest output units - lowest output units) to find variable cost per unit
Total cost - variable cost = fixed cost
Fixed cost + variable cost = total costs
