management accounting – the basics Flashcards
Revision of costing Classifying costs Classifying costs by nature Classifying costs by function Classifying costs by behaviour Capital versus revenue expenditure Cost units and cost centres Other types of responsibility centres
Why is it important to know the cost of producing each unit?
Knowing unit cost helps in setting selling prices to ensure profitability, valuing inventory accurately for financial statements, identifying cost-saving opportunities by analyzing high-cost areas, setting cost targets for production efficiency, and conducting variance analysis to assess performance against cost targets.
Variance analysis compares actual performance to set targets to pinpoint areas needing cost control or additional resources.
What is the prime cost of a product?
Prime cost is the total value of all direct costs directly linked to the production of a product, usually including direct materials and direct labor.
Prime costs are often variable, changing with production volume, making them key in calculating per-unit costs and in setting prices.
How are costs classified in cost accounting?
Costs are classified by nature (direct or indirect, based on traceability), function (production or non-production activities), and behavior (variable or fixed costs). Each classification aids in accurately assigning and managing costs within business operations.
Direct costs can be linked to individual units, while indirect costs are shared across multiple units, providing a clearer breakdown of production costs versus general business expenses.
What are examples of direct costs?
Direct costs include direct materials (e.g., wheels for a car) and direct labor (e.g., assembly time for each unit). These costs can be specifically traced to each unit produced, allowing for precise cost tracking.
Direct costs are typically variable and directly impact the total cost of production, often forming a large portion of the unit’s cost structure.
What is another name for indirect costs?
Indirect costs are also referred to as overheads and represent costs that cannot be traced directly to a single product but are necessary for the production environment.
Overheads cover shared expenses like utilities or rent, which are allocated across products to reflect their support role in production.
What defines indirect costs?
Indirect costs are shared costs not linked to individual units, such as rent or administrative expenses, which support the entire production process but cannot be attributed to any single item produced.
Indirect costs often include fixed costs, like building rent, essential for production but not directly tied to unit output.
Give examples of indirect costs in production.
Examples include factory rent, electricity for machinery, and administrative expenses. These costs are shared over all units produced within a given period, as they support production generally rather than individual units.
Indirect costs are commonly allocated based on usage or area, such as assigning rent to production based on square footage occupied.
What materials and labor can be classified as indirect costs?
Indirect materials like lightbulbs and indirect labor like supervisors’ salaries support the production environment but are not tied to specific units, making them indirect.
Unlike direct labor or materials, indirect costs are often fixed or semi-variable, reflecting shared use across many units.
What are production costs?
Production costs are incurred within the production process, including direct materials, direct labor, and indirect expenses like factory rent, reflecting all costs necessary to make units ready for sale.
Production costs are crucial for understanding per-unit production costs, impacting profitability and pricing.
What are non-production costs?
Non-production costs include expenses not specific to production, such as selling, distribution, and administration, representing broader business operations costs.
Non-production costs affect the business’s overall expense structure but do not alter per-unit production cost.
What costs are always classified as production costs?
Direct costs are always production costs, as they are directly tied to producing specific units and are incurred within the production facility.
These costs are essential for calculating gross profit per unit, a key metric in pricing and profitability.
What indirect costs can be classified as production costs?
Indirect costs, like factory supervision wages, may be classified as production costs since they support the production process even if not directly linked to individual units.
These costs are often allocated to production based on a reasonable method, such as time spent or area used.
What costs are always classified as non-production costs?
Indirect non-production costs, such as sales team wages, are always non-production as they do not contribute directly to manufacturing.
These costs fall under operating expenses, impacting the business’s net profitability.
What are variable costs?
Variable costs fluctuate with production volume, meaning total cost increases as production increases. Examples include direct materials or per-unit labor costs.
Variable costs per unit remain constant, but total variable cost changes with production, essential for budgeting and cost control.
How do you calculate total variable cost?
Total variable cost = Variable cost per unit × Budgeted production volume.
This formula is key for determining total production cost based on planned output, used in budget forecasting.
