Cost Classification Flashcards
What is a definition of responsibility centers?
A responsibility center is an individual part of a business whose manager has personal responsibility for its performance.
What are the main responsibility centers?
- Cost center
- Profit center
- Investment center
- Revenue center
What is a cost center?
Cost center is a part of the business for which costs are identified and recorded.
Where can cost centers be found?
Cost centers can be found in any production or service location, function, activity, item of equipment.
How is performance of cost center is measured?
Performance of cost center is measured by cost targets achieved.
What information of cost centers are needed by managers?
Costs incurred and charged to cost center.
What are examples of cost center?
Audit, tax, accountancy departments in an accounting firm.
What is a profit center?
Profit center is a part of the business for which costs incurred and revenue earned are identified and recorded.
Where can profit centers be found?
Profit centers can be found in divisions of large organizations. May include several cost and revenue centers.
How is performance of profit center is measured?
Performance of profit center is measured by the profit made by the center.
What information of profit centers are needed by managers?
Information about costs and revenues allocated to the profit center.
What are examples of profit center?
Wholesale and retail divisions in a paint company.
What is an investment center?
Investment center is a part of the business for which profits and capital employed are measured.
Where can investment centers be found?
Investment centers can be found in business units of large organizations.
How is performance of investment center is measured?
Performance of investment center is measured by return on capital employed.
What information of investment centers are needed by managers?
Information on costs, revenues and capital employed by the investment center.
What are examples of investment center?
UK and European divisions of a multinational company.
What is a revenue center?
Revenue center is a part of the business for which revenues earned are identified and recorded.
Where can revenue centers be found?
Revenue centers can be found in sales divisions.
How is performance of revenue center is measured?
Performance of revenue center is measured by the revenue earned.
What information of revenue centers are needed by managers?
Sales revenue earned by the individual revenue center.
What are examples of revenue center?
Regional sales areas within the retail division of a manufacturing company.
What is a cost object?
A cost object is any activity for which a separate measurement of cost is undertaken (product).
What is a cost unit?
A cost unit is a unit of product or service in relation to which costs are ascertained (hotel room).
What is a cost center?
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).
What is a cost card?
The cost card for a cost object, unit or center brings together all the costs relating to it.
What is included in a cost card of a product?
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
How can costs be classified?
Costs can be classified by:
- Element
- Function
- Nature
- Behavior
How are costs classified by element?
Costs classified by element:
- Materials
- Labor
- Expenses
How are costs classified by function?
Costs classified by function:
- Production
- Non-production
How are costs classified by nature?
Costs classified by nature:
- Direct
- Indirect
How are costs classified by behavior?
Costs classified by behavior:
- Variable
- Fixed
- Stepped fixed
- Semi-variable
What is a definition of materials?
Materials - all costs of materials purchased for production and non-production activities.
What is a definition of labor?
Labor - all staff costs relating to employees on the payroll of the organization.
What is a definition of expenses?
Expenses - all other costs which are not material or labor.
What is a definition of production costs?
Production costs are those incurred when raw materials are converted into finished and part-finished goods.
What is a definition of non-production costs?
Non-production costs are costs not directly associated with the production processes in a manufacturing organization.
How production costs are classified?
Production costs:
- Direct materials
- Direct labor
- Direct expenses
- Variable production overheads
- Fixed production overheads
What is a definition of direct materials?
Direct materials - materials which go into making the product.
What is a definition of direct labor?
Direct labor - labor directly involved in making the product.
What is a definition of direct expenses?
Direct expenses - cost of expenses directly involved in making the product.
What is a definition of variable production overheads?
Variable production overheads - indirect costs that relate to production that vary in direct proportion to the quantity manufactured.
What is a definition of fixed production overheads?
Fixed production overheads - indirect costs that relate to production that do not alter if the quantity manufactured changes.
How non-production costs are classified?
Non-production costs:
- Administrative costs
- Selling costs
- Distribution costs
- Finance costs
What is a definition of administrative costs?
Administrative costs - costs of running general admin.
What is a definition of selling costs?
Selling costs - costs associated with marketing and taking orders.
What is a definition of distribution costs?
Distribution costs - costs of distributing finished products.
What is a definition of finance costs?
Finance costs - costs incurred in financing an organization.
What is a definition of direct costs?
Direct costs - costs which can be directly identified with a specific unit or cost center.
What is an equation of direct costs?
Total of direct costs = direct materials + direct labor + direct expenses = prime cost
What is a definition of indirect costs?
Indirect costs - costs which cannot be directly identified to a specific unit or cost center.
What is an equation of indirect costs?
Indirect costs = indirect materials + indirect labor + indirect expenses = overheads
What is cost behavior?
Cost behavior is the way in which input vary with different levels of activity.
What is variable cost?
A cost that varies with the level of activity (direct material cost).
What is fixed cost?
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).
What is stepped fixed cost?
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).
What is semi-variable cost?
Cost with a fixed and variable element (telephone charges with fixed rental and charge per call).
What are the steps of calculating fixed and variable elements using high-low method?
- Select high and low activity levels and their associated costs.
- Find variable cost per unit.
- Find fixed cost by substitution.
What is an equation of variable cost per unit?
Variable cost per unit = change in cost / change in level of activity
What is an equation of fixed cost?
Fixed cost = total cost - total variable cost
What are cost equations?
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
What is a cost code?
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.
What are the methods of coding systems?
Coding systems:
- Sequential code
- Block code
- Hierarchical code
- Significant digit code
- Faceted code
What is a sequential code?
Sequential code - each code follows a numerical or alphabetical sequence.
What is a block code?
Block code - often used to categorize sequential codes together.
What is a hierarchical code?
Hierarchical code - each digit in the code represents a classification. As the code progresses from left to right each digit represents a smaller subset.
What is a significant digit code?
Significant digit code - is a code that contains individual digits and letters that are used to represent features of the coded item.
What is a faceted code?
Faceted code - is a code that is broken down into a number of facets or fields, each of which signifies a unit of information.
