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MANAGEMENT ACCOUNTING > Cost Classification > Flashcards

Cost Classification Flashcards

1
Q

What is a definition of responsibility centers?

A

A responsibility center is an individual part of a business whose manager has personal responsibility for its performance.

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2
Q

What are the main responsibility centers?

A
  • Cost center
  • Profit center
  • Investment center
  • Revenue center
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3
Q

What is a cost center?

A

Cost center is a part of the business for which costs are identified and recorded.

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4
Q

Where can cost centers be found?

A

Cost centers can be found in any production or service location, function, activity, item of equipment.

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5
Q

How is performance of cost center is measured?

A

Performance of cost center is measured by cost targets achieved.

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6
Q

What information of cost centers are needed by managers?

A

Costs incurred and charged to cost center.

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7
Q

What are examples of cost center?

A

Audit, tax, accountancy departments in an accounting firm.

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8
Q

What is a profit center?

A

Profit center is a part of the business for which costs incurred and revenue earned are identified and recorded.

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9
Q

Where can profit centers be found?

A

Profit centers can be found in divisions of large organizations. May include several cost and revenue centers.

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10
Q

How is performance of profit center is measured?

A

Performance of profit center is measured by the profit made by the center.

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11
Q

What information of profit centers are needed by managers?

A

Information about costs and revenues allocated to the profit center.

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12
Q

What are examples of profit center?

A

Wholesale and retail divisions in a paint company.

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13
Q

What is an investment center?

A

Investment center is a part of the business for which profits and capital employed are measured.

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14
Q

Where can investment centers be found?

A

Investment centers can be found in business units of large organizations.

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15
Q

How is performance of investment center is measured?

A

Performance of investment center is measured by return on capital employed.

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16
Q

What information of investment centers are needed by managers?

A

Information on costs, revenues and capital employed by the investment center.

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17
Q

What are examples of investment center?

A

UK and European divisions of a multinational company.

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18
Q

What is a revenue center?

A

Revenue center is a part of the business for which revenues earned are identified and recorded.

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19
Q

Where can revenue centers be found?

A

Revenue centers can be found in sales divisions.

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20
Q

How is performance of revenue center is measured?

A

Performance of revenue center is measured by the revenue earned.

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21
Q

What information of revenue centers are needed by managers?

A

Sales revenue earned by the individual revenue center.

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22
Q

What are examples of revenue center?

A

Regional sales areas within the retail division of a manufacturing company.

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23
Q

What is a cost object?

A

A cost object is any activity for which a separate measurement of cost is undertaken (product).

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24
Q

What is a cost unit?

A

A cost unit is a unit of product or service in relation to which costs are ascertained (hotel room).

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25
Q

What is a cost center?

A

A cost center is a production or service location, function, activity or item of equipment for which costs can be ascertained (ward in a hospital).

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26
Q

What is a cost card?

A

The cost card for a cost object, unit or center brings together all the costs relating to it.

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27
Q

What is included in a cost card of a product?

A

Direct materials
+
Direct labor
+
Direct expenses
=
PRIME COST

+
Variable production overheads
=
VARIABLE COST OF PRODUCTION

+
Fixed production overheads
=
TOTAL PRODUCTION COST

+
Non-production overheads
=
TOTAL COST OF A UNIT

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28
Q

How can costs be classified?

A

Costs can be classified by:
- Element
- Function
- Nature
- Behavior

29
Q

How are costs classified by element?

A

Costs classified by element:
- Materials
- Labor
- Expenses

30
Q

How are costs classified by function?

A

Costs classified by function:
- Production
- Non-production

31
Q

How are costs classified by nature?

A

Costs classified by nature:
- Direct
- Indirect

32
Q

How are costs classified by behavior?

A

Costs classified by behavior:
- Variable
- Fixed
- Stepped fixed
- Semi-variable

33
Q

What is a definition of materials?

A

Materials - all costs of materials purchased for production and non-production activities.

34
Q

What is a definition of labor?

A

Labor - all staff costs relating to employees on the payroll of the organization.

35
Q

What is a definition of expenses?

A

Expenses - all other costs which are not material or labor.

36
Q

What is a definition of production costs?

A

Production costs are those incurred when raw materials are converted into finished and part-finished goods.

37
Q

What is a definition of non-production costs?

A

Non-production costs are costs not directly associated with the production processes in a manufacturing organization.

38
Q

How production costs are classified?

A

Production costs:
- Direct materials
- Direct labor
- Direct expenses
- Variable production overheads
- Fixed production overheads

39
Q

What is a definition of direct materials?

A

Direct materials - materials which go into making the product.

40
Q

What is a definition of direct labor?

A

Direct labor - labor directly involved in making the product.

41
Q

What is a definition of direct expenses?

A

Direct expenses - cost of expenses directly involved in making the product.

42
Q

What is a definition of variable production overheads?

A

Variable production overheads - indirect costs that relate to production that vary in direct proportion to the quantity manufactured.

43
Q

What is a definition of fixed production overheads?

A

Fixed production overheads - indirect costs that relate to production that do not alter if the quantity manufactured changes.

44
Q

How non-production costs are classified?

A

Non-production costs:
- Administrative costs
- Selling costs
- Distribution costs
- Finance costs

45
Q

What is a definition of administrative costs?

A

Administrative costs - costs of running general admin.

46
Q

What is a definition of selling costs?

A

Selling costs - costs associated with marketing and taking orders.

47
Q

What is a definition of distribution costs?

A

Distribution costs - costs of distributing finished products.

48
Q

What is a definition of finance costs?

A

Finance costs - costs incurred in financing an organization.

49
Q

What is a definition of direct costs?

A

Direct costs - costs which can be directly identified with a specific unit or cost center.

50
Q

What is an equation of direct costs?

A

Total of direct costs = direct materials + direct labor + direct expenses = prime cost

51
Q

What is a definition of indirect costs?

A

Indirect costs - costs which cannot be directly identified to a specific unit or cost center.

52
Q

What is an equation of indirect costs?

A

Indirect costs = indirect materials + indirect labor + indirect expenses = overheads

53
Q

What is cost behavior?

A

Cost behavior is the way in which input vary with different levels of activity.

54
Q

What is variable cost?

A

A cost that varies with the level of activity (direct material cost).

55
Q

What is fixed cost?

A

A cost that is incurred for a period and that, within certain output and sales revenue limits, is unaffected by changes in the level of activity (output or sales revenue) (factory rent).

56
Q

What is stepped fixed cost?

A

A fixed cost which is only fixed within certain levels of activity. Once the upper activity level is reached a new level of fixed cost becomes relevant (warehouse costs and supervisors’ wages).

57
Q

What is semi-variable cost?

A

Cost with a fixed and variable element (telephone charges with fixed rental and charge per call).

58
Q

What are the steps of calculating fixed and variable elements using high-low method?

A
  1. Select high and low activity levels and their associated costs.
  2. Find variable cost per unit.
  3. Find fixed cost by substitution.
59
Q

What is an equation of variable cost per unit?

A

Variable cost per unit = change in cost / change in level of activity

60
Q

What is an equation of fixed cost?

A

Fixed cost = total cost - total variable cost

61
Q

What are cost equations?

A

Cost equations can be derived from historic data and then used to estimate future costs.

The total cost:
y = a + bx

a = fixed cost per period
b = variable cost per unit
x = activity level

62
Q

What is a cost code?

A

A code is a system of symbols designed to be applied to a classified set of items, to give a brief accurate reference, which helps entry to the records, collation and analysis.

63
Q

What are the methods of coding systems?

A

Coding systems:
- Sequential code
- Block code
- Hierarchical code
- Significant digit code
- Faceted code

64
Q

What is a sequential code?

A

Sequential code - each code follows a numerical or alphabetical sequence.

65
Q

What is a block code?

A

Block code - often used to categorize sequential codes together.

66
Q

What is a hierarchical code?

A

Hierarchical code - each digit in the code represents a classification. As the code progresses from left to right each digit represents a smaller subset.

67
Q

What is a significant digit code?

A

Significant digit code - is a code that contains individual digits and letters that are used to represent features of the coded item.

68
Q

What is a faceted code?

A

Faceted code - is a code that is broken down into a number of facets or fields, each of which signifies a unit of information.

MANAGEMENT ACCOUNTING (3 decks)

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