Week 6 - Cost Information and Behavior Flashcards
Cost Behavior is
how costs change with activity
Knowledge of cost behavior is essential for
- planning (preparing budgets)
- control (determining what costs should be at operating level achieved)
- decision making (e.g. make or buy; pricing)
Variable costs:
vary in direct proportion with activity
Fixed costs:
remain constant over wide ranges of activity
Stepped or Semi-Fixed costs:
are fixed within specified activity levels but they eventually increase or decrease by some constant amount at critical activity levels
Mixed or Semi-variable costs:
include both a fixed and a variable component (e.g. telephone charges)
A cost object is
anything for which a measurement of costs is desired
ex: the cost of feeding an animal for the winter; running an x-ray machine; producing a cake; equipment maintenance
Product cost is comprised of
- direct materials
- direct labor
- overhead (indirect cost) eg; light and heat, insurance of buildings, supervisors’ salaries, repairs, etc.
Direct costs vs Indirect costs
Direct costs can be specifically identified with a particular cost object (e.g. a product, a department, a service)
Indirect costs cannot be identified specifically with a particular cost object
A product cost is
the cost necessary to complete a product (direct materials, direct labor, overheads)
a period cost is
all time based overhead expenditures (e.g. selling and distribution)
Indirect costs are
incurred by a business but cannot be easily traced back to the production of a unit of output.
they are indirectly related to production.
the total of the indirect costs is often referred to as the overheads of the business
absorbing overheads into product cost (one product)
when attempting to cost a product include:
1. direct costs
2. indirect costs (overheads)
absorption costs is based on the principle that both direct and indirect costs are contained in the cost of a product
decision has to be made as to how to include the right proportion of overheads as part of the cost of a product
Absorbing overheads into Product cost (multiple products)
most businesses will produce a range of products
the task of sharing out the overheads among a range of products will be more of a challenge
most businesses will choose to utilize a cost center (departmental) overhead recovery rate
Absorption of overheads into cost units
- is achieved by deciding on a basis on which an overhead absorption rate (OHAR) will be calculated
- the basis will depend on the nature of the business production method
- it is usually based on either machine hours or labor hours
- once the basis has been decided, the OHAR can be calculated
- the cost unit can then have the correct amount of overheads charged to it (process known as Overhead recovery)
