Types of Cost Flashcards
What is a cost object?
Anything for which costs are incurred- product, service, centre, activity, customer or distributions channel
What is a cost centre?
Any unit/location/division to which costs are assigned or allocated
What is a profit centre?
type of division with responsibility for operating costs and revenues (statement of profit or loss)
What is a revenue centre?
responsibility to generate revenues only (no cost monitoring) ie sales division
What is an investment centre?
responsible for operating costs and revenues plus capital investment (has power to buy, ie asset purchases)
What is a cost unit?
unit of product or service in relation to which costs are determined (for example 1 nail is a cost object, 20 nails is a cost unit)
What is a composite cost unit?
two elements to the cost unit- ie patient/day or tonne/kilometer
what is historic cost?
historic cost of a item is what accountants usually use to produce accounts- costs that have already been incurred/recorded
what is economic cost?
opportunity cost (represents the next best course of action)
what is economic value?
amount someone is willing to pay for a item
What is a cost classification?
How to understand costs- arranging elements of cost into logical groups (fixed, variable, value adding), function or use
What is a direct cost?
expenditure that can be attributed to a specific cost unit (ie material)
What is the total of all direct costs?
Prime Cost
What is an indirect cost?
OVERHEADS- expenditure on labour/material/services that cannot be economically identified with a specific cost unit- Split into production and non-production overheads
What are productions overheads?
Indirect materials, wages, expenses (ie rent, rates, supervisor salary)
What are non-production overheads?
Admin, selling, distribution (salaries of head office, brochures, running costs of lorries)
How is labour different?
If overtime (premium) paid then that becomes an indirect cost UNLESS the customer has requested it or overtime is worked regularly
What are controllable costs?
costs that management can influence
what are uncontrollable costs?
costs that management cannot control within the current time period (ie tax)
what are variable costs?
costs that change as the level of activity changes
what are fixed costs?
costs that do not vary with activity
What is full production cost?
total of all production costs (material, labour etc) NOT non-production overheads
What is full cost?
total of all production and non-production costs
Prime Cost+ Full Production Cost+ Non-production overheads= FULL COST
what is marginal cost?
amount by which the total cost increases if one more unit of product is made (different from variable as it also includes fixed)
what is a period cost?
cost that is linked to a time period (usually fixed like salary) rather than directly to a unit of product or service
What 3 tests must a relevant cost pass?
Future Incremental cash flow
What is Future (in relevant cost)
decision being made today cannot change the past- only consider future costs (not past/sunk costs)
What is incremental (relevant cost)
only the costs affected by the decision are relevant (fixed costs can be ignored)
What is cash flow (relevant cost)
factual, not based on accounting conventions (depreciation and notional costs are not relevant)
Relevant cost analysis for materials?
is it in inventory= NO= relevant cost is current purchasing price
YES= is it currently being used somewhere else? NO=if used only losing scrap value
YES= can it be replaced? NO=opportunity cost (what could it have made elsewhere)
YES= Will need to buy more therefore current purchase price is relevant
Labour cost analysis?
Is labour at full capacity? NO= relevant cots is zero as they are idle
YES=could we hire more or work overtime? NO= relevant cost is the opportunity cost (VC of labour +lost contribution)
YES= relevant cost is cost of hiring more staff or the overtime cost
what is the deprival value?
If we were deprived of the asset, what would we chose to do? (value in use+scrap value vs replacement cost)
What is shareholder value?
total return to shareholders in terms of dividends and share price,
Why is identifying all costs important?
Cost reduction and cost control schemes and pricing decisions, maybe also legislation and adherence to standards (esp environmental)
What are the main issues faced with managing environmental costs?
identification and measurement (compliance costs, clean-up costs, conventional costs)
