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.
