Fundamentals of costing (1) Flashcards
Define management information
MI is any information prepared to assist management with planning, decision-making and control
Define management accounting
MA is the identification, generation, presentation, interpretation and use of relevant information to prepare management accounts and schedules
Define cost accounting
CA is the production of cost information to assist management
Financial accounting: Users - Purpose - Law (required or not) - Format - Scope - Information -
Users - External
Purpose - Record historical financial performance and position
Law - Prescribed by CA 06, GAAP, IFRS
Scope - Historical, covers business as a whole, usually gives minimum info required
Information - mostly financial
Management accounting: Users - Purpose - Law (required or not) - Format - Scope - Information -
Users - Internal
Purpose - Assist management in planning and controlling the business to make effective decisions
Law - No legal requirements
Format - Management discretion
Scope - Flexible, includes historical, current and future information which can focus on specific parts of the business
Information - Financial and non-financial key performance indicators (KPIs)
Define cost object
A cost object is anything for which we are trying to ascertain the cost (e.g. painting division, product x, machine y, person z…)
Define cost centre
A cost centre is a department, process or function where costs can be accumulated (e.g. goods inwards department, milling machine..)
Define cost unit
A cost unit is a product or service for which costs are determined (e.g. the cost of making a widget, a batch of marmalade)
Define composite cost unit
A composite cost unit is a cost unit made up of two parts. Most commonly it is a service provided where a unit of ‘production’ is hard to calculate and compare
What are the three elements of direct costs?
A direct cost is a cost which can be traced in full to a cost unit.
(1) Direct material costs - costs of materials used to make and sell a cost unit (e.g. a table)
(2) Direct labour costs - Costs of labour used to make a cost unit
(3) Direct expenses - Other costs incurred as a direct consequence of making a table (licence fee per table)
What is an indirect cost?
An indirect cost (or overheads) are costs incurred which cannot be traced directly and in full to a cost unit
Define production overheads
Production overheads are costs incurred (other than direct production costs) in producing the product or service. It includes indirect materials, indirect wages and indirect expenses.
Production overheads are also called manufacturing or factory overheads
ONLY production overheads can be included in the value of inventories
Define other (non-production) overheads
Non production overheads are overheads (other than production overheads) incurred in operating the business. They include:
(1) Admin overheads - costs involved in directing, controlling and administering the business
(2) Selling overhead - Costs incurred in raising sales and customer retention (sales rep commission)
(3) Distribution overhead - Costs incurred in packaging and delivering goods to customers
Non production overheads CANNOT be included in the value of inventories
Define product costs
Product costs are any costs incurred in the manufacture of goods/services
Product costs are incurred in inventory valuation and are therefore part of the cost of sales expense
Product costs include:
(1) Direct production costs (direct materials, d labour, d expenses)
(2) Production overheads
Define period costs
Period costs are costs deducted as an expense in the income statement in a particular period
Period costs are not included in inventory valuation
Define fixed costs
Costs incurred by the business MAY change with activity levels
Fixed costs - FC remain constant in total over a range of activity levels (e.g. salaries, rent, rates)
Fixed costs per unit of activity will fall as the activity level increases because the FC are being ‘spread’ over more units
Define variable costs
Variable costs change in total as the level of activity changes (e.g. total direct materials cost increase as output levels increase)
Variable costs per unit of activity remain constant as activity level changes
Define semi-variable costs
Semi-variable costs have both a fixed and variable element. They are therefore partly affected by a change in the level of activity.
Semi-variable costs are also called semi-fixed or mixed costs.
Define stepped-fixed costs
Costs are constant within the relevant range for each activity level but when a critical activity level is reached, the total cost incurred increases to the next step
Define responsibility accounting
Responsibility accounting is a system ensuring that responsibility for all the activities (costs and revenues) of the business can be assigned to individual managers in order to monitor and assess performance
Define responsibility centre
A responsibility centre is a department/function/process/division/product whose performance is the responsibility of a specific manager
Define controllable costs
Controllable costs can be influenced/changed by a manager’s decisions
Define uncontrollable costs
Uncontrollable costs cannot be influenced/changed by a manager’s decisions within a given time period
The ICAEW Code of Ethics implements the IFAC Code of Ethics. State the principles
Management information should be:
(1) Clear
(2) Accurate and complete
(3) Prepared on a timely basis
The code contains five fundamental principles:
(1) Integrity
(2) Objectivity
(3) Professional competence
(4) Confidentiality
(5) Professional behaviour
State the threats to objectivity identified by the ICAEW Code of Ethics
Familiarity - becomes too sympathetic to the interests of the client
Self-review - Responsible for reviewing subject matter for which the firm or individual were previously responsible
Self-interest - Could benefit from a financial or other interest in client
Intimidation - Deterred from acting by threats
Advocacy - Promotes, or may be seen to promote a client’s position or opinion
Name the safeguards to reduce risk of threat to objectivity
Consult with:
(1) Superiors
(2) Line manager
(3) Those charged with governance
(4) ICAEW
If the threat cannot be reduced:
(1) Refuse to remain associated with any information determined to be misleading
(2) Consider obtaining legal advice
(3) Consider whether to resign
