Classification of cost- management accounting Flashcards
What must be done so that information can be prepared for the managers?
cost must be classified
What does it mean if costs are classified?
organised into sets in a way that managers will find useful
What are the 3 basic ways to split up costs?
Materials costs
Labour costs
Expenses
What are material costs?
the costs of all sorts of raw materials, components and other goods used
What are some examples of material costs?
components to make a TV set
Cleaning materials
grease for machines
What are labour costs?
the cost of employees wages and salaries
What are expenses costs?
other costs which cannot be included in materials and labour
What are some examples of expenses costs?
rent and rates
telephone charges
insurance
How can the type of cost to the business be split?
Direct
Indirect
What are direct costs?
Clearly linked to a unit of output
Only paying because you make a product
What are some examples of direct costs?
Labour costs
Raw materials
What are indirect costs?
costs that we cannot directly link to a unit of output but still have to be paid
What are some examples of indirect costs?
Grease for machines
Heating for factory
Supervisors salary
What are material direct costs?
cost of raw materials from which the finished product is made
What are material indirect costs?
the cost of all other materials
What are labour direct costs?
wages paid to those who work the machinery on the production line or who are involved in assembly or finishing of product
What are labour indirect costs?
wages and salaries paid to all other employees (managers, supervisors, maintenance staff and admin staff)
What are expenses direct costs?
any expenses which can be attributed to particular units of output (royalties to product designer, fees linked to people who are not employees)
What are expenses indirect costs?
All other expenses (lighting and heating, rent, rates , telephone depreciation of fixed assets
Not directly linked to unit output
What are fixed costs?
Cost that does not change with output
Constant for a fixed time period and range of outputs
What is an example of a fixed cost?
Rent
What does the graph for the fixed cost per unit look like?
L shape on the graph with cost decreasing with output
What does the graph look like for total fixed costs?
Straight flat line with cost and output being the same
What are stepped costs?
fixed costs that increase at regular intervals
What are some examples of stepped costs?
Factory supervisors salary
What does the graph look like for stepped costs?
Looks like a set of stairs going up
What are semi-variable costs?
Costs that change with output but not directly or proportionately
What are some examples of semi-variable costs?
Utility bills (gas + electric)
What are variable costs?
cost that changes with output directly and proportionality
What do the graphs look like for variable costs?
Total= linear increase
Unit= straight, flat line
What is marginal cost?
The cost of producing 1 more unit
What is an example of marginal costs?
Making 100 pens and the cost to make the 101st unit
What will marginal cost usually be equal to?
Variable costs
Why must companies look at there marginal cost before making too many orders?
If at full capacity the cost of producing the extra unit will also be the cost of a new factory and workers
Why must companies look at there marginal cost before making too many orders?
If at full capacity the cost of producing the extra unit will also be the cost of a new factory and workers
How can a small increase units be managed when at full capacity?
Might have workers do overtime or give bonuses to create extra product
What is contribution?
The amount of money each product gives to wards paying fixed costs
What is the order for contribution? (For using it)
Fixed cost first then goes towards profit
What is the formula for contribution?
Sale price- unit variable cost
When would you use target profit?
when business survival depends on reaching a certain level of profit or choosing between different projects
What is the formula for target profits?
(Target profit + fixed costs)/ Unit contribution
What would the target profit be if units is 75000 selling price = 10.60 and variable cost =4.2 and fixed costs are 220,000?
Target profit= 75000x10.6=795000-220000-(4.2x75000)=260000
Unit contribution= 10.6-4.2=6.4
Number of units to reach target profit= (220000+260000)/6.4= 75000
