Cost Classification Flashcards
What characteristics are the perspectives from which cost info are viewed based on?
Cost behaviour, Assignment, Relevance, Function and Timing
What is a VARIABLE cost?
It increases/decreases in proportion with the level of activity
What is FIXED cost?
A cost that in total is unresponsive to change in activity. (Cost per unit would decrease as activity increase)
Is fixed costs, fixed for ALWAYS?
No, only fixed for a specific period of time (example: salary increase yearly)
What is a STEP cost?
Cost that is available only in fixed allotments - it varies with activity, but in a stepwise rather than linear
What is a MIXED cost?
Consists of 2 components: usually fixed and variable (example: telephone - fixed rental & variable call charges depending on length)
How does a mixed cost change with activity level?
Need to be split in the fixed and variable components first before it can be determined
Why do auditors carry out audit procedures?
To gain assurance that the FS are free from material misstatement
What is cost ASSIGNMENT?
Tracing or allocating costs to cost objects
What is a cost object?
The item to which the cost is to be traced or allocated
What is a DIRECT cost?
When it is feasible to trace the cost to the cost object
What is a INDIRECT cost?
When it is impossible or not feasible to trace the cost to the cost object
Are indirect costs then not assigned to cost objects?
Not necessarily, they can be traced to cost objects on some reasonable basis
What is a synonym for indirect costs?
Overhead Costs
What is RELEVANT costs?
To determine the financial effect of a decision
Three attributes of a relevant cost
- A future cost: value is determined by future cash flows (cost that has already happened cannot be changed by a decision (sunk cost))
- A differential cost: If a cost will not be changed by the decision, then it is irrelevant
- A cash flow: non-cash items (depreciation) are irrelevant for establishing the financial effect of the decision
What is an OPPORTUINITY cost?
The best benefit forgone by taking the proposed course of action
What is a DIFFERENTIAL cost?
A cost that differs between 2 alternatives
What is a SUNK cost?
A cost that has been already incurred and cannot be altered, and therefore not relevant
What is the FUNCTION of a cost?
It refers to the classification of costs in the FS in accordance with the function (or purpose)
Is function an aid to decision-making?
No, this is a matter of presentation
Is function an aid to decision-making?
No, this is a matter of presentation
When costs are classified by function, they are divided between what?
Inventoriable Costs and Non-inventoriable costs
What is INVENTORIABLE costs?
Costs that are included in inventory (all costs required in order to bring inventory to its present location and condition)
What is NON-INVENTORIABLE cost?
Operating costs: often subdivided into selling costs (sales commission) and admin costs (salary of accounting staff)
Manufacturing costs are inventoriable and can be subdivided into what?
Direct materials, direct labour and manufacturing overheads
Manufacturing costs are inventoriable and can be subdivided into what?
Direct materials, direct labour and manufacturing overheads
What is DIRECT material?
The physical inputs that can be traced to the manufactured product
What is DIRECT labour?
The amount of labour that is physically expended on a manufactured product
What is MANUFACTURING OVERHEADS?
Manufacturing costs that are classified as indirect when the product is the cost object (indirect materials & indirect labour)
What is manufacturing overheads further subdivided into?
Variable and fixed
What is the TIMING of a cost?
When a cost is recognised as an expense
What is a period cost?
A cost recognised as an expense immediately on being incurred
What is a product cost?
In an absorption costing system are absorbed in inventory and expensed only when inventory is sold
What is a product cost?
In an absorption costing system are absorbed in inventory and expensed only when inventory is sold
What are manufacturing costs classified as in a absorption costing system?
Product costs (non-manufacturing costs are period costs)
Name a few costs that would be regarded to get inventory into a saleable position
- Manufacturing costs: raw materials, labour
- Overheads: fixed & variable, typical expenses like depr, electricity, water, rent
- Delivery costs: incurred to get the product to the location from where it is sold
- Packaging costs: if any to get the product from where it will be sold (protective package)
What is an alternative inventory costing system to the absorption costing?
The variable costing system - this is more useful for internal reporting & decision-making
How does a variable costing system work?
It requires all FIXED costs to be recognised as an expense in the period in which they are incurred
