Cost Units, Cost Classification & Profit Reporting Flashcards
CHAPTER 3
Cost unit
A unit of product/service to which costs can be related
Does cost unit always a single item?
No !! - it can be in batches/room/night
Composite cost units
Cost units that are made up of two-part
Etc : patient per night cost
Purpose of knowing cost production of a cost unit
○ Start selling price
○ Decision making
○ Planning & budgeting
○ Control of resources & cost of production
○ Reporting results
Cost classification
Grouping of costs under common characteristics
Cost divided by nature
- Material
- Labour
- Expense
Cost divided by function
- Production/manufacturing
- Distribution & selling
- Marketing
- R&D
- Administration
- Finance
Cost divided by traceability
- Direct
- Indirect
Cost divided by responsibility
- Revenue centre
- Cost centre
- Investment centre
- Profit centre
Cost divided by behaviour
- Fixed
- Variable
- Mixed
- Step-up
Sum of direct costs is known as ??
Prime cost
Is non-production overhead included in calculation of production cost/ inventory valuation ??
NO - we only include non production overhead when calculating selling price
Cost behaviour
The way costs change as the level of activity changes
Level of activity
Amount of work done / Volume of production
Basic principle of cost behaviour
As the level of activity rises, costs will usually rise
Variable cost
○ Vary in total directly with the volume of output
○ Cost per unit is the same
Does all direct cost a variable cost
No - it is possible for a direct cost to be a fixed cost
———————————————–Variable cost –> cost/unit same
Let’s say :
We bought goods and bulk discount is given. Cost/unit before the discount and after the discount is not the same
∴ Direct cost but not variable
Fixed cost
Unaffected in total by increase or decrease in volume of output
- A period charge/ Relate to a span of time
Period cost
As time span increases, fixed costs will increase
Fixed cost per unit
Decrease as more units are produced
Stepped-fixed cost
Cost which are fixed in nature within certain levels of activity
Mixed costs / Semi-variable / Semi-fixed
Partly fixed & partly variable
Only partly affected by changes in activity level
Absorption costing
Cost of product for inventory valuation is variable production cost + fixed production cost
Marginal costing
Cost of product for inventory valuation is the variable production cost only
———————————————– Fixed cost is treated as period cost
Why profit under AC & MC differ ?
Changes in closing inventory level
Contribution
Sales - all variable/marginal cost
!! Sold !! NOT production ✖✖
Contribution per unit formula
Selling price - variable cost/unit
Total contribution formula
(Contribution/unit) × (Number of units SOLD)
In the long term, no difference between MC profit & AC profit
Any differences depends on whether inventory levels are rising / falling
Absorption costing or marginal costing better ?
Both are widely used for costing purpose but marginal costing helps in decision making as it higlights contribution - ‘contribution towards fixed cost & profit’
