Lecture 5 Flashcards
Cost Objective
A cost objective is any activity, project, product, department, or segment of an organization for which costs are accumulated and measured
Cost Unit
A cost unit is a unit of measurement used to allocate costs to a specific product or service
For example:chocolate factory as a cost object and the cost units are chocolate bars
Direct Cost
Direct costs that are directly attributable to each unit of output (they can be traced into each unit)
Indirect Cost
Overheads, cannot in any way be attributed to each unit produced. However, they need to be covered some how to make a profit
OAR per unit (Overhead Absorption Rate)
The common three types of direct costs
Material
Labour
Expenses
Material
Materials used in the production each unit but cannot be assigned to each product. For example, lubrication for the machines to bake bread.
Labour
Labour that cannot be directly tied into making each loaf of bread. For example the supervisor or production manager
Expenses
Costs other than material and labour that cannot be traced directly to the production of each unit of product. For example rent and business rates of the loaf factory
Prime cost
A prime cost is the total cost of all direct costs
Manufacturing/Production cost
- Direct Materials
- Direct Labour
- Indirect cost = Overhead Costs
Non-Manufacturing costs/Non production costs
- Administration Overheads
- Marketing Overhead
- Sales Overhead
Traditional Absorption Costs
Traditional Absorption Costing also known as full costing is a costing method where all manufacturing costs are assigned to products
Absorption Costs
Indirect costs are allocated to each unit of production, forming part of the total product cost. These costs are recovered when the product is sold, as customers effectively pay for them.
Advantages of absorption costs of the indirect costs overheads
Quick and Efficient = Lower Cost
Disadvantages of absorption costs of indirect costs overheads
- The allocation of costs to products on either a labour or machine hour basis too simplistic
- Overheads arise not in proportion to direct labour and machine hours but as a result of the range reasons
- Selling prices calculated on the basis of absorption costs may be wrong in one of two ways: - Overhead is either under-allocated and thus under-price the product, OR overhead is overallocated to products so overprices these products
Cost Driver
a factor that causes costs
Standard Cost
The predetermined cost per unit used in planning
