Costing nature and classification

Question 1

Main groupings of costing are based on…

Answer 1

costing and behaviour

Question 2

What are product costs?

Answer 2

Are all of the costs associated with the purchase/production of a product:

• DM
• DL
• MOH

Are the costs included as a cost of inventory and are recorded as an asset until the product is sold, then transferred to COGS.

Question 3

Product costs can be referred to as…

Answer 3

Prime costs and conversion costs.

Prime costs = all direct costs = DM + DL

Conversion costs = costs to convert the DM DL into the finished product = incl DL + MOH

Question 4

Period costs

Answer 4

all the costs not classified as a product cost

• selling and admin exp,
• expensed directly to the IS.

Question 5

Variable costs

Answer 5

Are those that vary in proportion to changes in activity

Question 6

Step variable costs

Answer 6

Costs that vary with the level of activity, but do so at incremental levels of activity.

Ex. clothing manufacturer… labour of the manufacturing line staff may be variable, but the labour of the supervisor may be step variable cost as they oversee a max of 10 employees but when it grows to 11 another supervisor will be hired.

Question 7

Fixed costs

Answer 7

Costs that remain constant regardless of the level of activity.

Question 8

Step fixed costs

Answer 8

Costs that are fixed up until a certain point, at which stage they incrementally increase.

Ex. rent for a factory is fixed, but when they increase production it will need a second factory.

Question 9

Mixed costs

Answer 9

Costs that possess both variable and fixed components

Ex. cell phone bill that has a fixed portion for monthly access to a plan but a charge per text message sent.

Question 10

Cost function =

Answer 10

TC = (VC x activity level) + FC

Question 11

Approaches to cost estimation (3)

Answer 11

• High low method
• Account analysis
• Regression analysis

Question 12

Steps of the high low method

Answer 12

1. Select the high and low points of activity
2. Determine the VC
   
   • Change in total cost/change in activity level
3. Determine the FC by using either the high or low activity level to solve the cost function
4. Determine the cost function

Question 13

Pros/cons of high low method

Answer 13

Pros

• Easy to apply
• Does not require a lot of info to complete
• Info needed is readily available

Cons

• Uses very limited data - can lead to significant errors in expectations
• Assumes that high and low points of activity are reflective of normal activity

Question 14

Regression analysis

Answer 14

The best method independent and dependent variables

Question 15

Account analysis

Answer 15

1. Separate costs based on f/v/m
2. Mixed costs require further analysis to be f/v
3. Cost function is determined by isolating FC and remaining VC/activity level to determine VC/unit
4. Cost function can be developed.