Module 2 Flashcards
What is a cost centre?
When costs are incurred they are allocated to a cost centre
Acts as a collecting place for expenses
Separately identified and controlled
What are some of the major functional areas of a manufacturing business?
Production- raw materials into finished goods
Service- allow other functions to oeprate
Admin- overall management
Sales- securing orders
Distribution- warehousing and delivery
Research and Development costs arise where?
Expenditure incurred in seeking new products or processes or ways of improving existing
Expenditure incurred in the development of research ideas to a level that may be implemented
Controllable vs non-controllable costs?
Managers must only be assessed on the basis of costs, revenues and investments which are under their control
What are the different types of responsibility centre?
Cost centre
Profit centre
Investment centre
(rising level of responsibility)
Features of an effective responsibility centre?
Clear definition of the centre boundaries
Clear link with manager responsible
Costs and revenues should be analysed into clearly defined categories
Cost centre responsibilities?
Does not generate any revenue
Provides support to other areas of the business
Manager only has discretion over costs, no influence on revenues or investment
Profit centre responsibilities?
Manager both responsible for costs and revenue, so profit
e.g. products under one manager
Investment centres responsibilities?
Authority to undertake capital expenditure as well as managing revenues and related costs
Cap ex is the purchase of fixed assets
What are direct unit costs?
Can be identified easily with a product or service
What are direct expenses?
Other costs which are traceable to individual units e.g. royalty payments for each unit, design costs for custom order
What is prime cost?
Sum of direct material cost, direct labour cost and direct expenses
Total of all cost items which can be charged directly to product units
What are indirect unit costs?
Can’t be easily identified with a product or service
Can only be charged to a cost unit on estimate
What are overhead expenses?
Indirect expenses
Shared between various products passing through the factory
What is the graph for fixed costs?
Straight horizontal line between price and activity
E.g. depreciation, rent
What is the graph for variable costs?
Starts at 0, positive correlation between price and activity
E.g. direct material cost (constant prices)
What is the graph for semi-variable cost?
Starts above 0 and positive correlation
Fixed charge plus rate per unit
e.g. telephone
What is the graph for a semi-fixed cost?
Stepped cost (like stairs) Fixed charges change at discrete activity levels E.g. extra salaries each time extra shift worked
Planning of activity level costs?
Identify nature of cost items to produce accurate budgets at expected levels of output
Variable costs will increase if higher outputs are expected, fixed won’t
Control of activity level costs?
Comparing actual to planned results
If actual output different to expected can’t meaningfully compare
Identify variances
What is cost plus pricing?
Work out cost to produce then use this as a basis to decide the price
Cost plus mark-up (percentage of cost)
What is contribution?
Sales- variable costs
Why use contribution?
Gives a better indication of the likely effect of increased or decreased sales of any product on profit
What is the overriding requirement or information to aid decision making?
Relevance
What are the sub-classifications of relevant cost?
Avoidable costs Incremental costs (vs sunk/committed) Opportunity costs
What is an avoidable cost?
One that will ceased to be incurred as a result of a decision
Only included in decision making if it is avoidable
What is an unavoidable cost?
Continue after a decision has been taken
What are incremental costs?
Additional cost that is only incurred if you follow a course of action
What is a sunk cost?
Cost which has already been incurred and is irrelevant to the decision making process
E.g. depreciation, development, materials in stock
What are opportunity costs?
Cost of the next best alternative use for the resource
What are the key considerations to be made in relation to staff relevant costs?
Are they paid regardless?
Are they full utilised?
If staff are paid a salary but not fully utilised what is the relevant cost?
Nil
Salary paid regardless- a sunk cost
If staff are paid a salary and are fully utilised, what is the relevant cost?
Either the lost income or any overtime you may have to pay
If staff are not paid a salary and not being fully utilised what is the relevant cost?
The extra (incremental) cost of hiring these staff
If staff are not paid a salary and are being fully utilised what is the relevant cost?
Lost income from taking them away from what they’re currently working on
What should you consider in terms of relevant cost for materials?
Are they already in stock?
Are they in regular use?
What is the relevant cost if the materials are in stock?
Cost of purchasing
What is the relevant cost if the materials are in stock and are regularly used in the business?
Cost to replace the goods so they can be used in future contracts
What is the relevant cost if materials are not in regular use and there is nothing else we can do with the materials?
0
Initial purchase is sunk
What is the relevant cost if the materials are not in regular use but there are other options for them?
Normally the most expensive of these other options- lose out on
