CIMA - Chapter 2.4 - Introduction to costing - inventory valuation and profit measurement Flashcards
What is the purpose of inventory valuation and profit measurement
For the purposes of inventory valuation and profit measurement, the cost accountant must calculate the cost of one unit.
The total cost of a cost unit is made up of the following three elements of cost.
- Materials
- Labour
- Other expenses (such as rent and rates, interest charges and so on)
What are Cost Elements
- Cost elements provide a detailed structure for tracking and analyzing costs under each category in Classification by Nature
- Cost elements can be classified as direct costs or indirect costs.
What are direct costs
What are indirect costs
what is the difference between Direct vs. Indirect Labor
Name the key Differences Between Direct and Indirect Costs
Explain the Cost Elements for Material Costs
Explain the Cost Elements for Labour Costs (Wages)
Explain the Cost Elements for Expenses (overheads) Costs
What are the Key Features of Expense as a Cost Element
what is the Relationship Between Cost Elements and Costs By Nature Classification
Cost elements are used in classification by nature (e.g., material, labor, and expenses). They form the basis for grouping costs into broader categories such as direct costs and indirect costs:
- Direct Costs: Costs directly linked to production (e.g., direct materials, direct labor).
- Indirect Costs: Overheads not directly linked to production (e.g., administrative salaries, factory rent).
What is the relationship between Cost Unit, Classification by Nature, and Cost Elements
What are Prime Costs
How Are Prime Costs defined
- Prime costs are the direct costs incurred in the production of goods or services.
- They include the costs of direct materials, direct labor and direct expenses
What are the characteristics of Prime Costs
What are indirect cost/overhead Costs
Indirect costs (or overhead costs) are “costs that are incurred in the course of making a product, providing a service, or running a department.
What are the Key Features of Indirect Costs / overhead Costs
What are the Types of indirect Costs / overhead Costs
- Production Overheads - incurred in the factory from receipt of the order until its completion
- Administrative Overheads - incurred in the direction, control and administration of an undertaking
- Distribution Overheads - incurred in making the packed product ready for despatch and delivering it to the customer.
- Selling overhead - expenses incurred in promoting sales and retaining customers
Provide Examples of production overheads
Provide Examples of Administration overheads
Provide examples of Selling overhead
What is Total expenditure
What cost element is overtime
Indirect - Labour
Whay is over time considered a indirect cost?
- Fairness in Cost Allocation - Charging overtime premium directly to the products made during overtime can unfairly increase their cost compared to items made during regular hours.
- Unpredictability - Overtime is not a consistent or predictable cost, making it difficult to trace directly to a single product or project.
- Accounting Standard Practices - Treating overtime premium as an overhead aligns with established accounting principles for cost allocation and reporting.
How is Overtime allocated
Spread Over All Production - Treat overtime premium as an overhead to spread the cost across all production or operations.
How do Cost Unit, Classification by Nature, and Cost Elements work together?
Provide examples of Distribution overhead
Key Differences Between Product Costs and Period Costs
