Cost Concepts, Behaviour and Terminology Flashcards
What is a cost?
A measure of resources used or given up to achieve a stated purpose
What is a cost objective?
Any activity for which a separate measurement of costs is required e.g what is the cost of manufacturing these trainers?
What is a cost object?
Anything for which cost data are desired – including products, product lines, customers, jobs and organizational subunits e.g. R&D-in a factory setting=product unit produced
What is cost classification?
A matter of grouping together costs which share the same attribute(s) relative to a stated cost objective e.g. Nike wants to find out revenue of footwear for different sports so may group products into football, running etc
How does cost classification relate to cost objectives?
- The cost objective should determine the classification to be used
- Changing the cost objective may alter the categorisation of a specific cost within a given classification
What are the main cost objectives?
- Assigning costs to cost objects - traceability (direct or indirect)
- Financial reporting - inventoriable or expensed (product or period)
- Predicting cost behaviour in response to changes in activity (fixed or variable)
- Assessing performance (controllable or uncontrollable)e.g. storm event in order to be fair
- Making decisions (differential, sunk, opportunity)
What is the activity of a manufacturing, retailing and services firms respectively?
•Manufacturing -Buy raw materials -Produce and sell finished goods • Retailing -Buy finished goods -Sell finished goods • Services -Provide tasks or activities for customers
What of costs in a manufacturing, retailing and services firm respectively?
• Manufacturing -Production costs: materials, labour -Non-production costs: Admin? Marketing? R&D? • Retailing -Selling costs: in-store employees -Others: Admin? Marketing? • Services -Project costs: Consultants assigned to specific customers (labour) -Others: Admin? Marketing
What is the inventory in a manufacturing, retailing and services firm respectively?
• Manufacturing -3 Types: raw material, work in progress (WIP), finished goods • Retailing -1 Type: finished goods • Services -NO physical inventory but some WIP
What happens to the cost of unsold goods and cost of goods sold in terms of financial statements for retail and manufacturing firms?
- The cost of unsold goods is reported on the balance sheet
* The cost of goods sold is reported on the profit and loss account/income statement
How is the cost of sales calculated for manufacturing and retail firms respectively?
• Retail -Opening stock +purchases -minus closing stock • Manufacturing -Opening FG stock +Cost of goods manufactured -Minus closing FG stock
How does the focus change in terms of costs when moving from financial to management accounting?
More focus on product costs than financial statement costs
In terms of the objective of the first cost, what are the reasons to assign costs to cost objects?
- To determine prices-allowing products to be sold for the right price
- Work out profitability-of each product
- Greater awareness of costs allows greater control
What costs are traced to cost objects?
Direct and indirect (much harder to assign and requires estimations/assumptions)
What are the indirect and direct costs categories in manufacturing?
- Direct materials
- Direct labour
- Manufacturing Overheads (indirect)
What are direct materials?
Those materials that become an integral part of the product and that can be conveniently traced directly to it e.g. car wheels (visible element)
What is direct labour?
Labour costs that can be easily traced to individual units of product e.g. salary of car assembly workers
What are manufacturing overheads?
• Manufacturing costs that cannot be traced directly to specific units produced e.g.
- indirect labour (Wages of employees who are not directly involved in production work e.g. cleaners)
- indirect materials (Materials used to support the production process e.g. lubricants/cleaning products used in car assembly formation)
How are manufacturing costs often combined (classified)?
- Direct materials+ direct labour=prime cost
- Direct labour + manufacturing overheads=conversion cost (need for labour plus factory operations to convert raw materials to FG)
What are non-manufacturing costs?
• Marketing and selling costs
Costs necessary to get the order and deliver the product
• Administrative costs
All executive, organisational and clerical costs
In terms of the second cost objective, what are the two cost types in financial reporting?
Product and period costs
What are product costs?
- Includes direct materials, direct labour, and manufacturing overheads
- Stock ->SOFP
- Cost of goods sold ->SOPL
What are period costs?
- Costs that cannot be capitalised on a firms balance sheet.
- They are expensed on the profit statement
What stock is put on a manufacturers balance sheet?
- Raw Materials-Materials waiting to be processed
- Work in Progress-Partially complete products
- Finished Goods- Completed products awaiting sale
For the 3rd cost objective, what are the different cost classifications when predicting cost behaviour?
- Total variable costs change when activity changes
* Total fixed costs remain unchanged when activity changes
what are the components of the activity base (cost drivers of variable costs) ?
- Units produced
- Miles driven
- Machine Hours
- Labour hours
What is variable cost per unit?
Variable cost per unit is the production cost for each unit produced that is affected by changes in a firm’s output or activity level e.g. cost per minute talked may be fixed
What is the fixed cost per unit?
Average fixed cost deceases as output increases e.g. month fixed phone rate will decrease on average per unit as more calls are made
What are some example fixed and variable costs for manufacturers and retailers?
• Variable
-manufacturers-Direct Material, direct labour, and variable manufacturing overhead
-retailers-Cost of Goods Sold, shipping costs
• Fixed
Retailers, manufacturers, and -taxes, insurance, sales salaries, depreciation, advertising
what is the importance of a relevant range?
- Relevant range is the volume range within which actual operations are likely to occur
- Seldom is a fixed cost fixed over all levels of activity and so may jump to a new higher cost when the activity goes above/below the relevant range
What are the two types of fixed costs?
Committed and discretionary
What is a committed fixed cost?
Long-term, cannot be reduced in the short term e.g. Depreciation on buildings and equipment
What is a discretionary fixed cost?
May be altered in the short-term (e.g. in recession) by current managerial decisions e.g. advertising and R&D
In terms of the 5th cost objective in making business decisions what are the different costs?
- Differential costs (and revenue)
- Sunk costs
- Opportunity costs
What are differential costs/revenue?
Difference in revenue and costs between two options e.g. choice may have higher initial costs but also higher differential revenue
What are opportunity costs?
The potential benefit that is given up when one alternative is selected over another e.g. choosing a plane engine from one manufacturer may be cheaper but has less capacity (future revenue)
What are sunk costs?
Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions e.g. boots spend 10k on market research- that cost should not impact decisions taken from the research
