MA 6 Costing - Nature and Classification Flashcards
Two main classifications of cost?
Nature and behavior
Two main items of nature costing?
Period and product
3 types of product costs?
DM
DL
MOH
Two types of product costs are direct and conversion costs - difference and examples
Prime costs include all direct costs - typically DM and DL
Conversion costs are costs to convert product into a finished good - including DL and MOH
Define period costs
Any costs not directly related to manufacturing a product - these are expensed as incurred
Define variable costs
Costs that vary depending on changes in activity
Define step variable costs
Costs that may “jump” dependant upon output - if a supervisor can manage 10 people, but a second is hired when there are 11 staff.
What does the relevant range mean?
Refers to the range of output at which estimated cost behaviour remains unchanged
TC formula
TC = VC x Activity Level (X) + FC
High-low method steps
- Select high and low points of activity.
- Determine VC by change in total cost / change in activity level
- Determine fixed cost using the TC formula
- Determine cost function (see handbook for example)
High-low method +-
easy to use, good to estimate
not accurate if not representative of normal business activity, limited data
What is the account analysis methodology?
Cost accountant will look at all accounts and classify them (variable/fixed/mixed etc) then the cost function is isolated by determining fixed costs. Remaining variable costs then divided by activity level to determine cost function.
Account analysis +/-
Very useful when expert knowledge of all accounts
Not helpful when “guessing”
Superior method for calculating cost function
Regression analysis
