Theory Flashcards
What is accounting?
The process of identifying, measuring & communicating both financial and non-financial economic information to permit informed judgements and decisions by the users of the information.
What does cost accounting deal with?
Preparation and presentation of cost information, mainly:
- Unit cost of product, work or service
- Various elements of cost of department or factory
- Volume of waste & technological losses
- Cost related to number of activities
- Cost analysis for decision making
difference between cost/mgmt accountacy vs financial accountancy
Cost and management accountancy - internal users
Financial accountancy - external users.
cost accountancy vs cost accounting
Cost Accountancy - academic discipline of applying cost accounting principles and methods to cost control and profit determination, as well as presenting information gathered DURING accounting for the purpose of decision making
Cost accounting - gathering of cost information and its attachment to:
- cost objects
- budgets and standard cost and actual cost of operations or products
- analysis of variances, profitability or social use of funds.
objectives of cost accounting
- ascertain the cost of production per unit
- fix selling price
- cost control
- Ascertainment of division, activity and unit-specific profitability
- Locating wastages and inefficiencies
- decision making - presentation of relevant data
What is a cost accounting system?
Systems and procedures devised for proper accounting for costs. Design depends on type of product/service:
- historic - ascertained after being incurred
- absorption (full) - all F and V costs allotted to cost units and total overheads absorbed according to activity level. Fails to establish RS b/w cost, volume and profit
- direct - only variable costs are included in unit cost fixed costs are considered period costs which are fully written off against contribution instead of being included in per unit cost calculations
- standard - pre-determined cost computed in advance of production by considering all the factors affecting cost. used for variance analysis in cost control
- uniform - adopting of identical costing principles by several units of the same industry by mutual agreement for valid comparison between organizations
difference between financial, cost and managament accounting
COME BACK TO THIS
What is cost?
monetary measurement of the total amount of resources used for production of goods or rendering services, actual or notional
the elements of cost: D/ID material, labour and expenses
notional: imputed cost or implicit cost
e.g. 1. Depreciation: Depreciation is a notional cost that is calculated to allocate the cost of a fixed asset over its useful life. 2. Interest on owner’s capital: Interest on owner’s capital is a notional cost that is calculated to reflect the cost of using the owner’s capital in the business. 3. Rent-free accommodation: If an employee is provided with rent-free accommodation, the value of the accommodation is considered a notional cost. 4. Employee benefits: Employee benefits such as health insurance, life insurance, and retirement plans are notional costs that are included in the compensation package.
Define direct material cost.
The cost of material that directly enters the product and forms part of the finished product, which can be measured and attributed to a cost object in an economically feasible way
e.g. cloth in dress-making, bricks in house-building
What are indirect material costs?
cost of materials which do not normally form a part of the finished product and cannot be allocated. Instead, they can be apportioned to cost centres/units e.g:
1) items used to maintain fixed assets like lubricant, bricks, cement
2) non-productive departments like power house, canteen
3) materials with negligible costs that are not worth being considered as direct materials
What is direct labour/employee
cost?
that labour which can be conveniently identified or attributed wholly to a particular job, product or process or expended in converting raw materials into finished goods.
Define indirect labour cost.
Labour cost that cannot be directly attributed to a particular cost object but which can be apportioned to cost centres/units e.g. maintenance workers; men employed in service departments, material handling and internal transport; apprentices, trainees and instructors; clerical staff and labour employed in time office and security office.
What are direct/chargeable expenses?
Expenses relating to a specific process or product other than direct material and labour costs:
(i) GST
(ii) Royalty
(iii) Architect or Supervisor’s fees; (iv) Cost of rectifying defective work; (v) Travelling expenses to the city; (vi) Experimental expenses of pilot projects
(vii) Expenses of designing or drawings of patterns or models; (viii) Repairs and maintenance of plant obtained on hire;
(ix) Hire of special equipment obtained for a contract.
What do overheads comprise?
Indirect materials, indirect employee cost, and indirect expenses not directly allocable to a cost object.
incurred for the general organization of the whole/part of the undertaking, i.e., the cost of operating supplies and services, including maintenance of capital assets.
What is prime cost?
The aggregate of Direct Material, Direct Labour, and Direct Expenses.
50%-80% of total cost of product (hence, PRIMARY to product cost)
main cost concepts
1) cost driver
2) cost centre
3) cost object
4) responsibility centre
5) cost unit
Define cost driver.
A factor that causes a business to incur costs.
e.g. machine hours cause costs such as electricity and maintenance, Number of advertisements and number of sales personnel.
What is a cost centre?
CIMA: A location, a person, or an item of equipment in relation to which costs are ascertained.
May be personal (person/group of people) or impersonal (location, equipment)
What is a cost object?
A product, service, project, department, or activity to which a cost relates.
What is a responsibility centre?
A segment of a business organization for which responsibility is assigned to a specific person.
What is a cost unit?
Narrowest possible level of cost object - the unit of product or service in which costs are expressed
e.g. service cost per tonne of steel, per tonne (or passenger) -kilometre of a transport service or per machine hour.
6 Bases of Cost Classification (CAS-1)
(a) Nature of expense - material, labour, direct expenses
(b) Functions - production/manufacturing; admin; selling/distribution; R&D
(c) Behaviour – Fixed, Semi-variable or Variable
(d) Management decision making - marginal, differential, opportunity, replacement, relevant, imputed, sunk, normal/abnormal, avoidable/unavoidable; out of pocket; engineered; managed
(e) Production or Process - batch, process, operating, joint
(f) Time Period - historical, predetermined, standard and estimated
classification by nature of production: batch, process, operating, joint
Batch Costing: Batch Costing is the aggregate cost related to a cost unit which consists of a group of similar articles which maintains its identity throughout one or more stages of production. In this method, the cost of a group of products is ascertained.
Process Costing: When the production process is such that goods are produced from a sequence of continuous or repetitive operations or processes, the cost incurred during a period is considered as Process Cost. The process cost per unit is derived by dividing the process cost by number of units produced in the process during the period.
Operating Cost: Operating cost is the cost incurred in conducting a business activity. Operating cost refer to the cost of undertakings which do not manufacture any product but which provide services.
Joint Costs: Joint costs are the common cost of facilities or services employed in the output of two or more simultaneously produced or otherwise closely related operations, commodities or services. When a production process is such that from a set of same input two or more distinguishably different products are produced together, products of greater importance are termed as Joint Products and products of minor importance are termed as By-products and the costs incurred prior to the point of separation are called Joint Costs. For example in petroleum industry petrol, diesel, kerosene, naphtha, tar is produced jointly in the refinery process
classification by time: historical; predetermined (standard and estimated)
Historical Costs: Historical Costs are the actual costs of acquiring assets or producing goods or services. They are post-mortem costs ascertained after they have been incurred and they represent the cost of actual operational performance.
Predetermined Costs: Pre-determined Costs for a product are computed in advance of production process, on the basis of a specification of all the factors affecting cost and cost data. Predetermined Costs may be either standard or estimated.
Standard Costs: A predetermined norm applies as a scale of reference for assessing actual cost, whether these are more or less. The Standard Cost serves as a basis of cost control and as a measure of productive efficiency, when ultimately posed with an actual cost.
Estimated Costs: Estimated Costs of a product are prepared in advance prior to the performance of operations or even before the acceptance of sale orders.
fixed vs variable vs semi-variable costs
define period costs - why is FC one
uses of a cost sheet
1) Cost Control: Helps identify areas of unnecessary expenditure.
2) Pricing Decisions: Aids in setting competitive prices by understanding costs.
3) Profitability Analysis: Shows whether the product is yielding profit or not.
4) Budgeting: Useful for preparing budgets and cost forecasts.
5) Transparency: Provides a clear breakdown of all costs.
What is fixed cost AKA PERIOD COST?
The cost which does not vary with the change in the volume of activity in the short run. Not
affected by temporary fluctuation in productive activity
Example: Rent, Depreciation…etc.
Define variable cost.
The cost of elements which tends to directly vary with the volume of activity.
either direct or indirect (AKA variable overheads e.g. direct labour, outward freight)
semi-variable costs
contain both fixed and variable elements and
are partly affected by fluctuation in the level of
activity
e.g.: Factory supervision, Maintenance…etc.
classification of costs for managerial decision making
What are relevant costs?
Costs which are relevant for a specific purpose or situation.
What are imputed costs?
Hypothetical or notional costs not involving cash outlay, computed for decision making.
What are sunk costs?
Historical costs that have been incurred and are not relevant to current decision making.
Differentiate between normal cost and abnormal cost.
Normal cost is normally incurred; abnormal cost is unusual and irregular.
What are avoidable costs?
Costs that should not have been incurred under conditions of performance efficiency.
What are out-of-pocket costs?
Costs that involve cash payments to other parties.
What is engineered cost?
Cost related to an item where the input has an explicit physical relationship with the output.
What are managed costs?
Costs where no accurate relationship between input and output can be established.
Define batch costing.
Aggregate cost related to a cost unit consisting of a group of similar articles.
What is process costing?
Cost incurred during a period from a sequence of continuous or repetitive operations.
What does operating cost refer to?
Cost incurred in conducting a business activity that provides services.
What are joint costs?
Common costs of facilities or services employed in the output of multiple operations.
What are historical costs?
Actual costs of acquiring assets or producing goods or services.
What are predetermined costs?
Costs computed in advance of the production process based on various factors.
Define standard costs.
A predetermined norm that serves as a basis for cost control.
What are estimated costs?
Costs prepared in advance prior to the performance of operations.
List the importance of a cost sheet.
- Cost Control
- Pricing Decisions
- Profitability Analysis
- Budgeting
- Transparency
What types of expenses should be excluded from a cost sheet?
- Financial and Non-Operational Expenses
- Capital Expenditures
- Appropriation of Profits
- Non-Cash Expenses
- Abnormal Costs
- Other Non-Relevant Items
What are some examples of financial and non-operational expenses?
- Interest on loans
- Dividend payments
- Loss on sale of fixed assets
- Income tax payments
- Bank charges
What are capital expenditures?
Costs related to acquiring or upgrading fixed assets.
Purchase of machinery or equipment
* Construction of buildings
* Major renovations
* Research and development costs (if not directly related to current production)
What is meant by appropriation of profits?
Allocations of profits, not costs.
- Dividends to shareholders
- Transfer to reserves
- Donations or charitable contributions
What are some examples of non-cash expenses?
- Goodwill amortization
- Preliminary expenses written off
What are abnormal costs?
One-time or extraordinary items that don’t reflect regular business activity.
Losses due to fire, theft, or natural calamities
* Expenses on abnormal idle time
* Costs related to accidents or employee compensation claims
What are examples of other non-relevant items to exclude from a cost sheet?
- Income from investments
- Profit on sale of fixed assets
- Miscellaneous non-operating incomes
