Costing Flashcards
What is a cost
Item of expenditure. The number of resources sacrificed to achieve a particular objective
What are the three cost classifications
Decision making
Allocation to products
Behaviour
What comes under decision making
Relevant or irrelevant
What comes under allocation to products
Direct or indirect
What comes under behaviour
Variable, semi variable, fixed, step fixed
What is a relevant cost
Any cost affected by a decision e.g opportunity or future outlay. They have not yet been incurred
What is an opportunity cost
The value of the opportunity foregone to pursue an alternative course of action
What is a future outlay cost
A cost which will be incurred in the future to achieve an objective
What is an irrelevant cost
Not affected by a decision. They have been incurred. Includes historic, sunk and committed.
What is a historic cost
The original cost
What is a sunk cost
A past cost which cannot be recovered
What is a committed cost
Future, agreed cost
What is a direct cost
Can be attributed directly to the product e.g direct labour
What is an indirect cost
Cannot be directly attributed to the product and therefore should be shared e.g rent
What is cost behaviour
How a cost varies with activity
What are variable costs
Vary directly with the number of units e.g cost of making materials
What are fixed costs
remain the same whatever the level of output e.g rent
What are semi-variable costs
Fixed with variable elements e.g telephone bills
What are step-fixed costs
Remain fixed as output increases until output reaches a level where it must increase sharply e.g supervisor costs
What does CVP mean
Cost volume profitability
What is cost volume profitability
Assists the relationship between cost and volume or activity and profit
What is the break even point
Where revenue will exactly equal total cost so there will be no profit or loss
Break even point equation
BEP = Fixed cost / (revenue - variable cost)
Also known as contribution per unit
What is the margin of safety
How many sales can be lost before there is a loss in profit. Difference between profit and break even
Margin of safety equation
(expected sales - break even sales) / expected sales x 100
What are the uses of break even analysis
- Working out how much to sell when starting a new business
- creating annual budgets
- Making changes to strategy
- Answering ‘what if’ statements
Limitations of break even analysis
- Multiproduct businesses - sales of other products may affect sales of another, hard to assign fixed costs to production lines therefore lacks accuracy.
-Assumes costs stay constant, the model must keep changing where costs do not stay the same so hard to build strategy off. Lacks reliability
-Doesn’t account for demand, hard to control external factors so it may not break even as predicted
-Doesnt account for changes in sales price (sales)
Usefulness of costing information
- Benchmarking against similar activities/ products
- Developing budgets and comparing outcomes to budgets
- Assessing performance by comparing outcomes to budgets
- Assessing performance by comparing to sales revenue
- Informing pricing (cost + a margin)
- Evaluating whether to enter a market
Full cost
Amount of resources sacrificed to achieve a given objective, considers all resources sacrificed
Relevant costing
Short term decision making
Full costing
Long term decision making e.g ensuring prices cover all costs
Job costing
Accumulation of costs to a distinct individual output (job) to determine the full cost
Full cost equation
Full cost = direct cost + fair share or indirect cost
What is another word for indirect cost
Overheads
What was traditional costing
Low levels of indirect cost with most costs spent on employees
Direct labour intensive
Even spread of overheads across products
What is the new order
Capital intensive
Machine intensive
High indirect costs
Volatile changes in consumer demand
What is total life cycle costing
Calculates total cost over its entire life
What are the steps of total life costing
- Pre-production phase (research and development, production set up, pre-production marketing)
2.Production phase (Manufacturing and marketing)
3.Post-production phase (after sales service)
What did Kaizen costing do for total life costing
Focused on the pre-producing costing phase
What is target costing
Selling price - target profit = target cost
Process of target costing
Market research to determine what price the market will bear
Steps taken to ensure actual cost equals target cost
What does ABC costing assume
Overheads increase and decrease due to activities
What are cost drivers
Any factor which affects total costs
What are cost pools
Relevant costs to a task, pooled together
How does ABC allocate overheads
Reflects proportions
ABC costing short run and long run variable costs
Short run variable costs vary with production volume (e.g sales commission)
Long run variable costs vary with level of activity (e.g marketing)
What are the 4 quality costs
Prevention, appraisal, internal failure and external failure
What are the 4 quality costs: Prevention
e.g staff training costs on quality issues
What are the 4 quality costs: Appraisal
e.g costs associated with monitoring quality processes
What are the 4 quality costs: Internal failure costs
Costs of substandard products or scraps
What are the 4 quality costs: External failure costs
Failure costs after the product reaches the consumer e.g loss of reputation
What does JIT manufacturing stand for and mean
Just in time for
Manufacturing begins only when necessary
Goods are created to meet demand
JIT manufacturing 6 step process
- rearrangement of production process to 1 product
2.reduce set up time
3.Increase emphasis on total quality management to eliminate defective production
4.Production cell workers trained to multitask
5.Adoption of JIT purchasing techniques so delivery immediately precedes use
- Modification of management accounting performance measures and product costing systems to support JIT production systems.
