Section B: Costing Flashcards
What is a cost centre/unit/object?
Cost centre: A collecting place for costs before they are further analysed.
Cost unit: A unit of product or service to which costs can be related.
Cost object: Anything a user of accounting information wants to know the cost of.
What is economic cost vs value?
Cost: What could have been accomplished with the resources used in the course of action not chosen.
Value: The most someone is willing to give up in £ to obtain a product or service.
How are costs classified?
Nature: Material, Labour Expenses
Function: Production costs, Admin Costs, Selling costs
Behaviour: Fixed, Variable costs.
Responsibility: Who is responsible for the cost.
What are direct vs indirect costs?
Direct Cost: A cost that can be traced in full to the product, service or department that is being costed. (Prime Cost)
Indirect Cost: A cost that cannot be traced directly to the product, service or department. (Overhead)
What are the types of relevant cost?
Avoidable cost: A cost that would not be incurred if the activity did not exist.
Differential cost: Relevant difference in the cost of alternatives.
Controllable cost: Item of expenditure which can be directly influences by a given manager
Opportunity cost: The benefit which would have been earned but which has been given up, by choosing one option instead of another.
Relevant Cost of labour: The direct labour cost plus the contribution lost by diverting labour to make another product.
What are the types of non-relevant cost?
Sunk Cost: A past historical cost which is not directly relevant in decision making.
Fixed Cost: Assume fixed costs are irrelevant and variable costs are relevant.
What is the basic principle of cost behaviour?
As the level of activity rises, costs will usually rise.
What are fixed / stepped / variable & semi-variable costs?
Fixed: Costs unaffected by increases/decreases in activity level. (Rent of a factory)
Stepped: Fixed within certain ranges of activity levels. (Software licence fees)
Variable: Costs that vary directly with the level of activity. (Direct production costs)
Semi Variable: Cost that contains both fixed and variable elements. (Telephone bills)
How to use scatter graph method to split out semi-variable costs?
Step 1: Plot data on scattergraph.
Step 2: Add a line of best fit.
Step 3: Fixed cost = Where line of best fit intersects Y axis.
Step 4: Variable cost per unit = (Total cost - Fixed Cost)/Activity level.
How to use High-Low method to split out semi-variable costs?
Step 1: Select periods with highest and lowest activity levels.
Step 2: Variable cost per unit = (High cost - Low cost / (High activity - Low Activity)
Step 3: Fixed costs = High cost - (Variable cost per unit * High activity level)
Step 4: You can now substitute in any activity level to predict total cost.
What is correlation & How to interpret results?
The extent to which the value of a dependant variable is related to the value of the independent variable.
R = 1 = Perfect positive correlation
R = 0 = No correlation
R = -1 = Perfect Negative Correlation.
What is the coefficient of determination?
R^2 tells us the proportion of the total variation in one variable that can be explained by variations in the value of the other variable.
What is allocation? & Examples?
Allocation is the process by which whole cost items are charged directly to a cost unit or centre. Eg, Cost of Security guard charged to Warehouse cost centre.
How do we apportion overheads?
1: Identify what type of overhead. (Production, service, distribution etc)
2: Apportion the service cost centre o/heads to production cost centres (Reapportionment)
Eg, Rent and rates shared out across cost centres based on floor area.
What are the basis of absorption?
Unit
Direct labour hours
Machine hours
Why do we use predetermined OAR? & How to calculate?
Because many OARs are not known until the end of the period which would cause delays in invoicing, inventory valuation etc.
OAR = Budgeted Overhead / Budgeted Activity Level
Why do we get Over/Under absorption of O/heads?
Because OAR is predetermined from budget estimates.
When actual overheads incurred are different to budgeted OARs. This causes variances.
What is the NOPU rule?
Negative = Over absorbed
Positive = Under absorbed.
What is ABC?
1: Identify an organisations major activities.
2: Identify cost drivers
3: Collect the costs associated with each activity into cost pools .
4: Change support overheads to produce on the basis of their usage of the activity. (Measured by the number of the activity’s cost drivers they generate.)
What are the Absorption costing steps?
Step 1: Allocate direct costs to cost units.
Step 2: Allocate (Whole cost units) and apportion (Cost items divided by cost centres) overheads to cost centres
Step 3: Reapportion service cost centre overheads
Step 4: Absorb overheads into cost units.
What is marginal cost?
The cost of one unit of product which would be avoided if that unit were not produced.
Made up of:
Direct materials
Direct labour
Variable production overheads.
What is contribution?
Contribution per unit = Selling price - Variable costs.
Total contribution - fixed costs = profit.
What are the principles of marginal costing?
Only variable costs are charged as cost of sales.
Closing inventory is valued at marginal cost
Fixed costs are treated as period costs
Period costs are charged in full against profit
If sales increase by one unit, profit will increase by the contribution from one unit.
Contribution per unit is constant at all levels of output and sales.
How to reconcile between Marginal and Absorption profit & how to interpret?
Marginal profit + (Closing - Opening inv) * OAR) = Absorption profit.
If Opening inventory is greater than closing = Marginal profit higher.
If Closing inventory is higher than Opening = Absorption higher.
