Week 2 - Cost Classification Flashcards
What is a Cost Object?
A cost object is anything a business wants to measure costs for. It can be a product, service, project, department, or customer.
Example: a bakery sells cakes and cookies. If the bakery wants to know how much it costs to make each cake, then the cake is the cost object.
Define Cost Unit.
A cost unit is a specific measure of a product or service that a business uses to calculate costs. It helps track how much it costs to produce one unit of something.
Example: a bakery may use “per cake” as a cost unit to track the cost of ingredients and baking.
What is a Cost Centre?
A cost center is a part of a business where costs are incurred, but it doesn’t directly generate revenue. It’s a department or area where costs are tracked separately.
Money is spent but not generated in cost centres.
Example: the cleaning team in a company is a cost center. They help keep the place clean, but they don’t directly bring in any income.
What does a Cost Card show?
A cost card is a record that shows the costs involved in making a product or providing a service. It lists all the costs, like materials, labor, and overheads, for each unit of production.
Example: A bakery might have a cost card for each type of cake, showing how much it costs for ingredients, baking time, and energy to bake one cake.
What are Cost Elements in production?
Cost elements are the different types of costs that a business has when making a product.
Example: In making a toy, cost elements could include:
- Material costs (like plastic and paint)
- Labor costs (paying workers to assemble the toy)
- Overhead costs (like electricity used in the factory).
What are production costs?
Production costs are the total costs a business spends to make a product. These costs include everything needed to produce the goods, like raw materials, labor, and factory expenses.
Example: For a shirt, production costs would cover fabric, stitching, and the factory’s electricity bills to run machines.
What are non-production costs?
Non-production costs are expenses that are not related to making a product but still support the business. These costs include things like sales, marketing, and office expenses.
Example: Advertising costs or salaries for office staff are non-production costs because they help run the business but aren’t directly involved in making products.
What is closing inventory?
Also known as “stock”
At the end of the financial year, a company may have units which it has produced but not yet sold in its warehouse.
Example: If a store has 100 shirts left at the end of the month, the value of those 100 shirts is the closing inventory.
Which part of the balance sheet is closing inventory included in?
The closing inventory is valued at cost and included as assets in the company’s statement of financial position (balance sheet) at the year end.
When valuing the closing inventory, which kind of costs are and aren’t included?
When valuing the closing inventory, the company includes all the costs directly related to producing the items (like raw materials, labor, and factory overheads).
However, it does not include non-production costs, which are expenses not related to the production process.
What are direct costs?
Direct costs are expenses that can be directly traced to making a specific product or providing a service. These costs change depending on how much is produced.
Example: For a bakery, direct costs would include ingredients like flour, sugar, and eggs used to make cakes. These costs are directly tied to the production of the cakes.
What is the total of direct costs known as?
The prime cost
What are indirect costs?
Indirect costs are expenses that help the business run but cannot be directly traced to making a specific product or service. These costs are spread across many products or services.
Example: The electricity bill for the bakery or the salary of the manager is an indirect cost because they are needed for the business to run but aren’t directly linked to making any specific cake.
What is the total of indirect costs known as?
Overheads
What are variable costs?
Variable costs are expenses that change depending on how much a business produces or sells. The more you make or sell, the higher these costs are.
Example: In a bakery, the cost of flour and sugar is a variable cost because the more cakes you bake, the more flour and sugar you need.
What are fixed costs?
Fixed costs are expenses that stay the same, no matter how much a business produces or sells. These costs don’t change even if production goes up or down.
Example: Rent for a bakery is a fixed cost because you pay the same amount every month, regardless of how many cakes you bake.
What are stepped fixed costs?
Stepped fixed costs are expenses that stay the same for a certain level of production, but increase in steps when production goes beyond a certain point.
Example: If a bakery can handle making 100 cakes with one oven, the cost of using that oven is fixed. But if the bakery starts making 200 cakes, it may need to buy a second oven, which increases the fixed costs. The cost “steps up” when more ovens are needed.
What are semi-variable costs?
Semi-variable costs are expenses that have both fixed and variable parts. There is a fixed cost that stays the same, and a variable cost that changes depending on how much is produced or sold.
Example: A phone bill with a fixed monthly charge plus extra costs for calls made. The fixed part stays the same, but the total bill increases if more calls are made.
