Module 2- Classification of Costs Flashcards
Controllable costs
Costs, revenues and investments that are under management control
Non-controllable costs
Costs not under direct control of a manager often controllable at company or group level
Responsibility centres
A company division, product or department under a manager’s control
Three types of responsibility centre:
- cost centre
- profit centre
- investment centre
cost centre
Part of a business that does not generate any revenue - responsibility over cost
Profit centre
Manager is responsible for both costs and revenue and therefore, profit
Investment centre
Manager has the authority to undertake capital expenditure as well as managing revenues and related costs
Direct costs
Those identified easily with a product or service
Prime cost
sum of direct material cost, direct labour cost and direct expenses
Indirect costs
Cannot be easily identified with one particular product or service
Overhead costs
Any cost which doesn’t relate to one specific product
Fixed costs
Do not change no matter how many units of an item are produced
Variable costs
Costs which change based on production
Semi-variable costs
E.g. electricity bill with a standing charge
Semi-fixed cost
Fixed charge changes at discrete activity level
Relevant cost
Cost or saving which will arise as a result of making a business decision
Sub-classifications of relevant cost
- avoidable
- incremental
- opportunity
Avoidable cost
one which will cease to be incurred as a result of a decision
Incremental costs
An incremental cost is an additional cost that is only incurred if you follow of a course of action
Sunk costs
A cost which has already incurred and is irrecoverable and therefore irrelevant to the decision making process
Opportunity cost
The cost of the next best alternative use for the resource
RC for fully utilised salaried staff
Overtime rate
RC for fully utilised non-salaried staff
Charge out rate
RC for not fully utilised salaried staff
Zero
RC for not fully utilised non-salaried staff
cost of paying them
RC for materials not in stock
Cost to replace
RC for materials in stock in regular use
Cost to replace
RC for materials not in regular use with no choice of opportunities
Nil - sunk
RC for materials not in regular use with a choice of opportunities
Highest of lost opportunities
