Cost Classification Flashcards
Why do we classify costs?
Management accounting involves gathering information about costs. Costs need to be classified. This type of classification is determined by the purpose for which costs are required. This purpose is called the cost objective.
What are the two types of manufacturing costs?
Direct and indirect costs
What are direct costs?
They can be directly traced to each unit of production or service provided.
Materials: raw materials used directly in the manufacturing project e.g timber in the manufacturing of furniture
Labour: direct manufacturing wages that can be traced to each unit of production e.g where employees are paid on a piece rate basis
Expenses: expenses that can be traced directly to each unit e.g patent royalties or hire of special machines
Direct costs are entered as prime cost on the manufacturing account
What are indirect costs (overheads)?
They cannot be directly traced to each unit of product produced or service provided. These costs must be included in the overall total cost.
Materials: materials used that are difficult to quantify e.g paint or varnish
Labour: cannot be traced to each unit of production
Expenses: other costs involved in manufacturing that cannot be traced directly. They are also known as factory overheads e.g light, hear, depreciation of machinery
What are non manufacturing costs?
They are the costs involved in running a business outside of the manufacturing process. They include:
The administration costs (running of a business)
Selling and distribution costs
What are fixed costs?
Costs that must be paid and remains the same amount, regardless of activity. E.g rent, rates, straight line deprecation and supervisor’s salary
What are variable costs?
Costs that changed with the level of activity. The more you produce, the more it will cost. E.g direct materials, direct labour, direct expenses
What are step fixed costs?
Costs that are fixed within a certain range of activity but change outside of that range
What are step variable costs?
Variable costs can also be incurred in steps. E.g 5000 bottles of water cost €5000 (€1 per bottle)
10,000 bottles cost €7500 (€0.75 per bottle)
What are economies of scale?
A proportional saving un costs from an increased level of production. A firm benefits from buying items such as raw materials in bulk
What are controllable costs?
Costs that can be controlled by the manager of a cost centre. The manager can decided the amount of the cost. Managers are responsible for any variances that occur. Most variable costs are controllable
What are uncontrollable costs?
Costs that cannot be controlled by the manager. The manager has no choice on the amount. Managers cannot be held responsible for variances that may occur. Rates are set by the local authority and must be paid
What are period costs?
Costs that relate to the accounting period rather than the level of production. They are primarily fixed and do not change with the level of activity. E.g annual insurance, rent, rates
What are mixed costs?
Contain both a fixed and variable component . The fixed element doesn’t change with activity, the variable component does change with activity. E.g sales commission to sales personnel - they get a fixed salary, and then a variable commission
