Costs Flashcards
Costs based on behaviours
Variable costs vary with the level of production or other activity measure. As production increases, variable costs increase proportionally.
Fixed costs remain the same across levels of production or other activity measure. As production increases, fixed costs do not change.
Mixed costs have a component of variable costs and a component of fixed costs. As production increases, only the variable component will increase,
Costs based on relationship to cost objects
Direct costs are directly related/attributable to a cost object. If a cost object is a unit of production then direct material, direct labour and direct overheads are directly traceable to the product.
Indirect costs are costs incurred but are not directly traceable to a cost object, such as manufacturing overheads for all products.
Costs based by treatment
A product cost is directly linked to the manufacture of a product, whereas a period cost is linked to a particular accounting period but cannot be linked to a particular product.
Types of product costs
Direct materials - raw materials that are turned into finished products and can be easily linked to a product.
Indirect materials - raw materials that are included in finished products but cannot be easily linked to a particular product or are consumed in the manufacturing process.
Direct labour - wages of the employees who manufacture a product or provide a service to customers.
Indirect labour - wages of the factory supervisors and other people working in the factory but are not directly involved in the product manufacture.
Factory overhead - costs incurred in manufacturing a product that cannot be easily linked to a product.
Costs based on time
Sunk costs - past costs that cannot be changed in the future.
Relevant costs - future costs linked to a particular investment proposal.
Process costing
Used when a business manufactures a large set of identical products.
Job order costing
Used when a business manufactures a small number of identical products or when each product made is unique.
Reasons for a direct material price variance.
F - cheaper supplier found.
U - unexpected increase in raw material price.
Reasons for a direct material usage variance.
F - use of a higher grade raw material than described in the standard may result in the business using a smaller quantity of raw material.
U - wastage of raw material by poorly trained or inexperienced workers.
Reasons for a direct labour rate variance.
F - the greater the unexpected use of low qualified, cheap to employ, workers.
U - unexpected pay rise, using high paid workers to do the jobs normally carried out by lower paid workers.
Reasons for a direct labour efficiency variance.
F - improved productivity achieved by better motivated employees or introduction of new, more efficient plant and equipment.
U - poorly trained or inexperienced employees, plant and equipment breaks down forcing employees to take time off work.
Explain the difference between actual and normal costing.
Actual costing applies actual costs to the actual quantity of product produced to obtain the product cost.
Normal costing determines the cost of a product from actual direct materials and labour costs and a predetermined overhead rate applied to the actual quantity produced.
What does a price variance and efficiency variance measure?
A price variance measures whether the price paid for the unit of input was more or less than the standard price.
An efficiency variance measures whether the actual quantity of input used was more or less than allowed.
List some drivers of variable manufacturing overhead.
Machine hours, direct manufacturing labour costs/hours, number of parts per product, number of testing hours, maintenance hours.
What do the variances reveal about the pricing of the upholstered seat?
Paid 3.50 more for the seating fabric than estimated. External supplier may have increased prices, or may have purchased a more expensive type of fabric than originally budgeted for.
Paid 50 cents more for the workers per hour than estimated.
Workers may have been subject to an award pay increase, or more skilled labour may have been employed at a higher rate of pay.
