L2 -Cost Concepts, Behaviour and Terminology Flashcards
What is a cost?
A cost is a measure of resources used or given up to achieve a stated purpose
What is the cost objective?
A cost objective is any activity for which a separate measurement of costs is required
What is the cost object?
A cost object is anything for which cost data are desired – including products, product lines, customers, jobs and organizational subunits
What is Cost Classification?
Cost classification is essentially a matter of grouping together costs which share the same attribute(s) relative to a stated cost objective
Note:
- The cost objective should determine the classification to be used
- Changing the cost objective may alter the categorisation of a specific cost within a given classification
What are the main Cost Objectives of a company and how they are classified?
- Assigning costs to cost objects - traceability (direct or indirect)
- Financial reporting - inventoriable or expensed (product or period)
- Predicting cost behaviour in response to changes in activity (fixed or variable)
- Assessing performance (controllable e.g. buying the wrong product or uncontrollable e.g. adverse weather ) –> of responsibility managers - the role is to improving revenue and containing costs
- Making decisions (differential, sunk, opportunity
How do costs differ between different types of companies?
How does retailing and Manufacturing Activities compare?
What costs do management accountants focus on compared to financial accountants?
The focus changes from financial statement costs to products costs
- Financial Accounting –> Cost is a measure of resources used or given up to achieve a stated purpose
- Management Accounting –> Product costs are the costs a company assigns to units produced
Why do we assign costs to cost objects?
- To determine prices
- to calculate profitability
- to control spending within the organisation
What are direct costs?
- A direct cost is a price that can be directly tied to the production of specific goods or services. A direct cost can be traced to the cost object, which can be a service, product, or department
e. g .for a car this would be radio, lights, mirrors
What are indirect costs?
Indirect costs, on the other hand, are expenses unrelated to producing a good or service. An indirect cost cannot be easily traced to a product, department, activity or project.
- These are common to all process in the production
- Sometimes it easy, like cleaners and maintenance workers for cars but how would you quantify the electricity used purely for manufacturing a car?
What are the three main manufacturing costs?
-
Direct Materials -
- Those materials that become an integral part of the product and that can be conveniently traced directly to it - a radio in a car
-
Direct Labour -
- those labour costs that can be easily traced to individual units of product - wages paid to car assembly workers
-
Manufacturing Overhead - indirect cost
- Manufacturing costs that cannot be traced directly to specific units produced
-
Indirect Labour –> Wages paid to employees who are not directly involved in production work
- Examples: maintenance workers, cleaners and security guards
- Indirect materials –> Materials used to support the production process
- Examples: lubricants and cleaning supplies used in the car assembly plant
How are Manufacturing costs classified?
Prime Cost –> Direct Material and Direct Labour
- the direct cost of a commodity in terms of the materials and labour involved in its production, excluding fixed costs.
Conversion Costs –> Direct Labour and Manufacturing Overhead
- Conversion costs is a term used in cost accounting that represents the combination of direct labor costs and manufacturing overhead costs. In other words, conversion costs are a manufacturer’s product or production costs other than the cost of a product’s direct materials
What are the two types of non-manufacturing costs?
- Marketing and selling costs …
- Costs necessary to get the order and deliver the product
- Administrative costs …
- All executive, organisational and clerical costs
What are Product costs?
Product costs include direct materials, direct labour, and manufacturing overhead
- Until the product is sold it appears on the balance sheet as stock
- Once it has been sold it appears under Cost of Goods Sold Product costs include direct materials, direct labour, and manufacturing overhead on the income statement
How does the Current Asset section of a balance sheet differ between retailer and manufacturer?
How does the Profit statement compare between a retailer and a manufacturer?
What is the Manufacturing Cost Flow?
What is the Stock Flow?
Used to find how the value of stock has changed during a period
How are fixed costs defined?
remain unchanged when activity changes
e.g. your monthly basic telephone bill probably does not change when you make more local calls
other examples include:
- Taxes
- insurance
- sales salaries
- depreciation
- advertising
What is relevant range?
- As you produce more chairs - raw materials may start to become limited and you are charged more per unit for producing over a certain amount - material costs increase
- Seldom is a fixed cost fixed overall levels of activity
- The relevant range is the volume range within which actual operations are likely to occur
- for example a supervisor could oversee the manufacturing of a 100 cars, but you would need two supervisors to oversee 100-200 cars being produced
What are the differential costs and revenues?
