Slosting Flashcards
Into which three elements are Costs broken down?
Materials
Labour
Expenses
What are Material Costs?
Costs related with the purchase of anything tangible e.g. raw materials, stock or goods to be used within the business (such as stationery).
What are Labour Costs?
All and every Cost related to employing staff e.g. bonuses and maternity leave and employer’s tax deductions.
NB: payment of people who are not your employees (not on your payroll) is not classified as Labour Costs.
What are Expenses Costs?
Costs incurred in keeping the business running e.g. Overheads, cleaning services or security.
In general, anything that doesn’t fall into either of the other two categories.
What should be noted in relation to expenses in financial and management accounting?
It has different meanings in financial accounting and management accounting.
What are the two natures of Costs?
Direct Costs
Indirect costs
What are Direct Costs?
Costs directly associated with each product being sold.
Which three criteria must be satisfied for a Cost to Direct?
1 - It must be essential for preparing the good (or services) for sale. If the item can be prepared and sold without a given cost, than that is not a Direct Cost. Includes labour in contact with the product.
2 - It must apply to each and every item produced; so overtime costs are divided into two parts: basic pay (direct cost) and overtime premium (indirect cost).
3 - The cost must be identifiable (certain) in advance.
What is a fourth condition for Costs to be direct that some businesses will apply?
The cost must be non-negligible. If it is small, let it go.
What are indirect costs?
Give examples of indirect expenses and labour costs.
Costs not associated with every single product; and costs which are negligible.
Negligibility is subjective from company to company.
Indirect labour related to employees who do not make the products or overtime labour costs.
Indirect expenses are called overheads. These are expenses which are not directly associated with production.
Which four behaviours can Costs be classified into?
Variable
Semi-Variable
Stepped
Fixed
What are variable costs?
Costs that change in direct proportion to the number of units of output.
What are fixed costs?
Costs which don’t change with the variation of units of output e.g. rent.
How will a variable costs graph look like?
It will start at origin and have a y=mx+b format i.e. positive slopping straight line.
b is the y-intercept and since the curve starts at origin b is 0.
m is the slope or the unit of output price.
So, for variable costs y=mx
How will a fixed costs graph look like?
The curve will be flat across the graph.
y=mx+b where the m is 0.
Is employees’ pay a variable or fixed cost?
Basic pay is a fixed cost but it becomes semi-variable if commission or overtime are paid.
Is Depreciation a fixed or variable cost?
Because it is based on the value of the asset and not on the number of assets produced (most times), it is considered a fixed cost.
What is a semi-variable cost?
A cost which has an element of both fixed and variable in it.
Graph will look like the variable costs one but without starting at the origin.
How is the total variable cost of a semi-variable calculated?
Total Cost - Fixed Cost = total variable cost
Which method is used when only the total cost of a semi-variable cost is known?
The high/low method.
What is the high/low method?
To use this method info about at least two periods must be had.
Difference in cost/Difference in units=variable cost per unit
Or slope=variable cost per unit
What are Stepped Costs?
When the cost is fixed up to a certain level and then fixed again up to another level.
Give examples of variable costs.
The materials used in making a product
For a delivery business or bus company, the cost of the fuel for the vehicle
For a restaurant, food ingredients; serviettes.
Commission paid to Sales staff
The cost of the wages of production staff
Credit card fees
Give examples of fixed costs.
Council Tax
Advertising
Director’s salaries
Electricity (usually)
Leased equipment charges
Software
Depreciation (in almost all cases)
Give examples of semi-variable costs.
Sales staff paid a commission plus a flat rate.
Hiring a vehicle with a flat charge plus mileage charge
Telephone costs in a retail business
Metered electricity for the production machines.
Give examples of stepped costs.
The cost of employing a supervisor where there will be (say) 1 per 10 factory operatives
Warehouse storage with a fixed capacity.
What does activity mean?
The number of units produced
What is OAR?
Overhead Absorption Rate.
Prediction of how much overhead costs are expected on each unit of production; so that a selling price can be calculated.
What is the direct labour hour method of OAR calculation?
It’s OAR related to hours of direct labour costs rather than units of production.
If it is needed to apply the OAR to individual products than an estimate of how long each product will take to be produced is made.
What is the machine hour method of OAR calculation?
It’s OAR related to hours of machine activity rather than units of production or direct labour.
If it is needed to apply the OAR to individual products than an estimate of how long each product will take to be produced by the machine is made.
What is a cost centre?
A place (mostly), product or person to which costs are allocated.
What are profit centres and investment centres?
Places, products or people to which “costs and income” are allocated
How are Costs and investment centres identified?
By code numbers i.e. department IDs
Which two forms can Costs be given in?
Total costs or unit costs.
By which three methods can fixed overhead be absorbed into the cost of each unit?
Unit of output method
Direct labour hour method
Machine hours method
What are the three types of stock held by manufacturing businesses?
Raw Materials
Work in progress (WIP)
Finished Goods
What is the calculation of the cost of sales for the small retailer?
Opening inventory
PLUS
Purchases
MINUS
Closing inventory
What do large manufacturing businesses use to keep control of material costs?
They will keep Manufacturing Accounts.
What costs will a Manufacturing Account show?
Direct Materials
Direct Costs
Manufacturing Costs
Cost of goods manufactured
Cost of goods sold
What is the “first in first out (fifo)” method of inventory valuation?
Stock with the oldest cost price are issued first.
Stock is recorded in batches. When goods are received they are recorded as one batch with a total quantity, a total price and a unit price.
What is a stock card?
A record of issue and of what remains in stock (balance).
What basic info will a Stock Card show?
Date
Receipts (Quantity, Cost per unit, Total Cost)
Issues (same)
Balance (same)
What is the “last in, first out (lifo)” method of inventory valuation?
Stock with the most recent cost price is issued.
What is the “average cost (avco)” method of inventory valuation?
How is it calculated?
Used when it is difficult to separate stock by batches.
Unit price is recalculated after an issue: (total cost - total issued cost) / number of units left
Which method of inventory valuation is not accepted by HMRC?
The LIFO method;
What is the typical format of costing codes?
A two-part code. The first part describing the cost centre (e.g. tables) and the second part describing how the cost is analysed (e.g. labour costs).
Further parts may be added, for example to show if the cost is direct or indirect.
What is a wise thing to do when setting up coding systems?
To leave gaps between the numbers so that if, in future, a number needs to be added, it can be done in between if appropriate.
Describe the different labour cost behaviours.
Time rate
Time rate is a FIXED COST.
Describe the different labour cost behaviours.
Piecework
Piecework is a VARIABLE COST
Describe the different labour cost behaviours.
Time rate plus bonus
Time rate plus a bonus is a SEMI-VARIABLE COST
Describe the different labour cost behaviours.
Variable piecework
Variable piecework is stepped.
Stepped Costs usually apply to processes and not individuals.
What is prime cost?
The total of all direct costs.
What are the 3 main purposes of cost accounting?
Assisting in making business decisions;
Assisting in making plans for the future;
Assisting in controlling expenditure.
Give the 8 main differences between financial accounting and cost accounting.
- Financial accounts usually describe one year while management accounts can describe any time period;
- Financial accounts are legally required while management accounts are not;
- Set formats are prescribed for financial accounts while none is for management accounts;
- Financial accounts describe the business as a whole while management accounts focus specific areas of a business;
- Financial account report only monetary information while management accounts report both monetary and non-monetary data;
- Financial accounts are historic while management accounts use historic data to create prospective data;
- Financial accounts are prepared mostly for external use while management accounts are internal;
- Financial account require precision of information while management accounts works well with estimates and focus on timeliness.
What is a cost unit?
Whatever thing the cost of which we are trying to find.
