Week 3 Flashcards
Cost Classification
by Nature- i.e direct/indirect
by Function- i.e production, marketing, research and development, administration etc.
by Behaviour- i.e fixed/variable/functional cost
by Element- i.e material labour or overhead expense
Cost Objectives
A cost object is any activity for which a separate measurement of cost is required (cost of making a product or providing a service)
A cost collection system normally accounts for costs
in two broad stages:
-Accumulating costs by classifying them into certain categories (e.g. labour, materials and overheads).
-Assigning costs to cost objects.
Direct and Indirect Costs
Direct costs of a cost object are those that are related to a given cost object (product, department, etc.) and that can be traced to it in an economically feasible way.
Indirect costs are related to the particular cost object but cannot be traced to it in an economically feasible way.
Prime Cost and Conversion Cost
In a manufacturing organisation, manufacturing costs would be direct costs and non-manufacturing costs would be indirect costs.
Prime Costs- are expenditures directly related to creating finished products (direct materials, direct labour)
Conversion Costs- are expenses incurred when turning raw materials into a product (direct labour, manufacturing overhead)
Product and Period Costs
Product costs (or manufacturing costs)- are those costs that are attached to the products and therefore included in the stock (inventory) valuation (raw material, labour, and production overhead)
Period costs (or non-manufacturing costs)- are not attached to the products and are not included in the inventory valuation (marketing and administration expenses)
Cost Behaviour Patterns
Variable costs vary in direct proportion with activity (change in total in proportion to changes in the related level of total activity or volume).
Fixed costs remain constant over wide ranges of activity (do not change in total for a given time period despite wide changes in the related level of total activity or volume).
Semi-fixed costs are fixed within specified activity levels, but they eventually increase or decrease by some constant amount at critical activity levels.
Semi-variable costs include both a fixed and a variable component (e.g. telephone charges)
Cost Volume Profit (CVP) Analysis
the study of the interrelationships between costs and volume and how they impact profit
A basic planning tool available to manager
CVP analysis examines the behaviour of total revenues, total costs, and operating profit as changes occur in the:
output level, selling price, variable costs per unit, or fixed costs
CVP aids management in:
* setting prices for products and services.
* introducing a new product or service.
* replacing a piece of equipment.
* make or buy decisions.
* performing strategic “what if?” analyses
CVP Assumptions and Terminology
Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold.
Total costs can be divided into a fixed component and a component that is variable with respect to the level of output.
When graphed, the behaviour of total revenues and total costs is linear (straight-line) in relation to output units within the relevant range (and time period).
The unit selling price, unit variable costs, and fixed costs are known and constant.
The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will remain constant as the level of total units sold changes.
All revenues and costs can be added and compared without taking into account the time value of money.
