Lecture 2 Cost Classification Flashcards
What are the components of total cost when making a product or providing a service?
- Cost of materials
- Labour Costs
- Cost of other expenses (overheads)
What is a Direct Cost?
A cost that can be traced in full to the product, service, or department that is being costed.
Give examples of Direct Costs.
- Direct material Cost (e.g. Raw material used in production)
- Direct Labour Cost (e.g. Production staff)
- Direct Expenses (e.g. Royalties and Hire of special equipment)
What is the formula for calculating Prime Cost?
Direct materials cost + Direct labour costs + Direct expenses
What is an Indirect Cost?
A cost incurred in the course of making a product, providing a service, or running a department, but cannot be traced directly and in full to the product, service, or department.
What does Production Overhead include?
- Indirect Materials
- Indirect wages
- Indirect Expenses
What are examples of Indirect Materials?
Consumable stores, materials used in negligible amounts.
List examples of Indirect Wages.
- Wages of non-productive personnel in the production department (e.g. foremen)
- Basic pay of Indirect Workers
- Overtime premium
- Bonus Payments
- Employer’s National Insurance Contributions
- Idle time of direct and indirect workers
What are examples of Indirect Expenses?
- Rent
- Rates
- Insurance of a factory
- Depreciation charge of machinery
- Fuel
- Power
- Maintenance of plant
What is the formula for Total Indirect Cost / Overheads?
Indirect material cost + indirect wages + Indirect Expenses
What is Administration Overhead?
All indirect material costs, wages, and expenses incurred in the direction, control, and administration of an undertaking.
Give examples of Administration Overhead.
- Depreciation of office buildings and equipment
- Office salaries (including salaries of directors, secretaries, and accountants)
- Rent, rates, insurance, lighting, cleaning, telephone charges
What is Selling Overhead?
All indirect material costs, wages, and expenses incurred in promoting sales and retaining customers.
List examples of Selling Overhead.
- Printing and stationery (e.g. catalogues and price lists)
- Salaries and commissions of salesmen, representatives, and sales department staff
- Advertising and sales promotion
- Market research
- Rent, rates, and insurance of sales offices and showrooms
- Bad debts
What is Distribution Overhead?
All indirect material costs, wages, and expenses incurred in making the packed product ready for dispatch and delivering it to the customer.
Provide examples of Distribution Overhead.
- Cost of packing cases
- Wages of packers, drivers, and dispatch clerks
- Insurance charges
- Rent, rates, depreciation of warehouses
What are Functional Costs?
Costs classified by different functions.
List the types of Functional Costs.
- Production Costs
- Administration Costs
- Selling Costs
- Distribution Costs
- Research Costs
- Financing Costs
What are Production Costs?
Costs incurred by the sequence of operations beginning with the supply of raw materials and ending with the completion of the product ready for warehousing.
What are Administration Costs?
Costs of managing an organization, including planning and controlling its operations.
What are Selling Costs?
Costs of creating demand for products and securing firm orders from customers.
What are Distribution Costs?
Costs of the sequence of operations from receipt of finished goods to dispatch and reconditioning of empty containers.
What are Research Costs?
Costs of searching for new or improved products.
What are Development Costs?
Costs incurred between the decision to produce a new or improved product and the commencement of full manufacture.
What are Financing Costs?
Costs incurred to finance the business, such as loan interest.
What is a Responsibility Centre?
Any part of an organization for which performance can be measured and is the direct responsibility of a specific manager.
What is Responsibility Accounting?
A system of accounting that segregates revenue and costs into areas of personnel responsibility to monitor and assess performance.
List the categories of Responsibility Centres.
- Cost Centres
- Profit Centres
- Investment Centres
- Cost Objects
What is a Cost Centre?
A production or service location, function, or activity for which costs can be determined.
What is a Profit Centre?
A production or service location, function, or activity for which costs and revenues can be determined.
Can all Profit Centres also be Cost Centres?
Yes, but not all Cost Centres can be Profit Centres.
What is an Investment Centre?
A production or service location, function, or activity for which costs, revenues, and net assets can be determined.
What is a Cost Object?
Any activity for which a separate measure of costs is desired.
Give examples of Cost Objects.
- The cost of a product
- The cost of a service
- The cost of operating a department
