Cost Accounting Flashcards
Theory
What is Cost Accounting?
Cost accounting is about measuring, analysing,
recording and reporting on the cost of a
product or service.
What is the Purpose of Cost Accounting?
- To determine profitability – used to
determine if its worth producing or selling a
product or service. - To set selling price – the cost of a product or
service can be used to set selling price. - To control costs – compare actual product
costs with planned costs. - Planning – use past product costs to estimate
future product costs. - Inventory valuation – used to calculate the
value of finished or semi-finished goods at
the end of each accounting period.
What will the cost of the finished item contain?
The cost of the finished item will contain
three basic costs which are:
◦ direct materials
◦ direct labour and
◦ manufacturing overhead costs
These are called manufacturing costs and all
other costs are non-manufacturing costs
What is Direct Materials?
Direct materials, are raw materials that go into the making of a
product.
◦ for example: the making of a suit of clothing the raw materials
would be such items as the fabric, the inner lining, buttons
and cotton thread.
Raw materials can be either direct materials or
indirect materials.
◦ Direct materials are those raw materials that are directly
traceable to the product being made.
◦ Indirect materials are those raw materials that cannot be
traced to a particular unit of production and they are a part
of manufacturing overhead.
What is Direct Labour?
Is Labour costs that represent, the following types of costs that are
paid to the employees of the business such as:
◦ Wages
◦ Salaries
◦ Long service leave
◦ Sick leave
◦ Payroll tax
These costs are classified as either direct or indirect labour.
◦ The direct labour cost is that amount paid to the employees which
is traceable to the finished product.
◦ Indirect labour costs represent that cost of labour paid to those
whose task cannot easily be traced to the finished product being
made.
What is Overheads?
Manufacturing overhead represents those costs, which are
not direct materials or direct labour, but are still part of the
manufacturing process.
These costs are indirectly connected to the finished goods
and are sometimes called factory overhead.
Examples of Manufacturing Overheads includes:
◦ Indirect materials
◦ Indirect labour
◦ Electricity, water and gas used in the making of a product
◦ Depreciation
◦ Insurance
◦ Maintenance of the factory buildings
◦ Repairs to equipment used in the manufacturing process.
Explain Variable Cost Behaviours
Variable costs
◦ A variable cost is one that changes in total as the level of
activity changes.
◦ For example the cost of raw materials in total will increase
as the level of units produced increases; however the cost
(e.g. $30 per unit) does not change.
◦ Examples of Variable Costs includes:
Wages used to make glassware
Raw materials used in the making of a computer
Cost of goods sold
Commission paid to salespeople
Explain Fixed Cost Behaviours
Fixed costs are those that do not change in total
when the level of activity changes.
◦ for example: the rent of a factory building will be the same in total
no matter how many units are produced.
Examples of Fixed Costs
◦ Depreciation of factory machinery
◦ Office supervisor’s salary
◦ Rent of a shop
◦ Insurance of motor vehicles
Explain Mixed Cost Behaviours
Some costs are mixed or semi-variable
costs. These costs contain both a fixed and
variable elements.
◦ for example: water rates and water usage bill will
contain the water rates cost, which is a
fixed cost, and the cost of water
consumption, which is a variable cost.
Relationship of Direct Costs to the Cost Object
Direct costs
A direct cost is able to be traced to a product or service with
a high degree of accuracy.
◦ Directly traceable means that the cost can be physically and easily
(i.e. economically and conveniently) traced to the finished product.
◦ Direct materials and direct labour are the two most common
direct costs for a business.
Examples of Direct Costs
◦ Raw materials used in making gold ring
◦ Wages of a mechanic in a car repair business
◦ Parts and supplies used in a panel beating business
◦ Cost of bottles used in making wine
◦ Cost of paint used in making a motor cycle
Relationship of Indirect Costs to the Cost Object
Indirect costs
Indirect costs are not easily traced to a product or
service. These are items that are not actually
incorporated in the product or are too insignificant
to make it worth tracing the cost to the finished
product.
Examples of Indirect Costs
◦ Salary of the factory manager
◦ Local government rates and taxes
◦ Nails and washers used in making outdoor wood furniture
◦ Oil and lubricants used in maintaining factory machinery
◦ Insurance of the business premises
Treatment of Product Costs
Product costs
A product costs includes all those costs that are attributable
to a product
◦ A product cost is recorded as an expense in the period in
which the product is sold and this will be recorded as the
cost of goods. Before it is sold, it is recorded as an asset.
◦ Examples of Product Costs includes:
Direct materials used in the making of a surfboard
Direct labour used in making a diamond ring
Overheads assigned to the manufacture of a ball gown
Treatment of Period Costs
Period costs
The costs, that are not product costs are period costs.
◦ Period costs are an expense and therefore shown in the business
income statement in the period in which they are incurred.
◦ Examples of Period Costs includes:
Advertising
Wages paid to sales personnel
Office rent
Insurance of office equipment
A period cost is a cost that relates to the current accounting
period and which do not have a future economic benefit to
the business.
What is Non-Manufacturing Costs?
Costs of operating a business that are not
incurred in the manufacturing process are
called non-manufacturing costs.
These can be categorised in such ways as
selling or marketing costs, distribution or
transport costs, administration costs and
financial costs.
What is Job-Order Costing?
Job order costing, is the process of recording all the costs of a
distinct product or service.
It is used when a business creates a single unit or multiple
units of a distinct product, makes a product to customer
order or provides a service to meet specific customer
requirements.
for example:
◦ Repair customer’s vehicle
◦ Custom holiday for a client
◦ Medical consultation for a patient
◦ Alterations to a ball gown for a client
◦ Produce birthday invitations for a client
◦ Building a computer for a customer
What is Normal Costing?
Normal costing determines the cost of a
product or service with job order costing
using actual direct materials, actual direct
labour and a predetermined overhead rate.
The predetermined overhead rate allocates
the indirect costs of production to the actual
quantity of the product or service produced.
What is Standard Cost?
An accounting system used to calculate the
most efficient cost of manufacturing the
products of a business.
The standard costs are recorded in the
accounting system and later compared to the
actual manufacturing costs.
The difference between actual manufacturing
costs and standard costs is known as a
variance. The variance can be favourable (F)
or unfavourable (U).
Standard costing is a system of product
costing whereby the cost of a product is
based on standard costs for direct materials,
direct labour and manufacturing overheads.
A standard cost is a predetermined cost and
based on some preconceived benchmark as
to what is considered appropriate to the
making of a product.
What are the 2 Direct Material Variances?
Direct material variances, includes:
Direct material price variance:
This is the difference between what the actual
quantity of material used did cost and what it should
have cost.
Direct material usage variance:
This is the difference between how much material
should have been used for the number of units
actually produced and how much material was used,
valued at standard cost.
What are the 2 Direct Labour Variances?
Direct labour variances, includes:
Direct labour rate variance:
This is the difference between what the actual
number of hours worked should have cost and what it
did cost.
Direct labour efficiency variance:
The is the difference between how many hours
should have been worked for the number of units
actually produced and how many hours were worked,
valued at the standard rate per hour.
What is Variance Analysis?
A variance is the difference between an actual
result and an expected result.
When actual results are better than the
expected results, we have a favourable
variance (F). When actual results are worse
than expected results, we have an
unfavourable variance (U).
Variance analysis is the comparison of the
actual results compared to the standard
amount or value.
What is the Mark-Up Concept?
The mark-up is the amount (either in dollars or
percentage) added to the unit cost price of a
product or service to determine its selling price.
The mark-up percentage will be determined
considering a number of factors relevant to the
business and/or the product or service.
These factors include the desired rate of return on
investment and competition in the market place.
What is Quotes?
A quotation for a product (‘quote’) is an estimate
given by the producer to the customer before the
good or service is provided on the basis of which
the customer will decide whether or not to
purchase the product or service.
This would be useful to such businesses as:
◦ Panel beaters
◦ Mechanics
◦ Installers of pergolas, blinds and carpets
◦ Dentists in the case of inserting a crown or tooth implant
Summary of Types of Costs
Manufacturing or Non Manufacturing Costs:
◦Manufacturing – factory worker’s wages, raw materials.
◦Non-Manufacturing – salary of sales staff.
Direct or Indirect Costs:
◦Direct materials – raw materials used in manufacturing.
◦Direct labour - manufacturing the product.
◦Indirect material costs – materials that cannot be directly traced to the product,
for example: varnish use to manufacture a table.
◦Indirect labour costs – factory supervisor salary.
Fixed, Variable or Mixed Costs:
◦Fixed costs – e.g. factory rent.
◦Variable costs – raw materials and wages of factory employees.
Product or Period Costs:
◦Product costs – direct materials, direct labour and other costs related directly to
the manufacturing process.
◦Period costs – operating expenses, e.g. administration expenses.
