Cost Classification And Materials Cost Flashcards
(13 cards)
What do the terms cost, cost unit, cost centre, cost object, cost objective, cost behaviour, and cost classification mean
Cost: The monetary valuation of resources used in producing goods or services.
Cost Unit: A unit of product or service in relation to which costs are ascertained.
Cost Centre: A department or unit within an organization where costs are incurred and tracked.
Cost Object: Any item (product, service, project) for which costs are measured.
Cost Objective: The purpose for which cost data is required (e.g., pricing, profitability analysis).
Cost Behaviour: How costs change in response to changes in activity or volume (fixed, variable, or semi-variable).
Cost Classification: The method of grouping costs (by function, behavior, traceability, controllability, etc.) to analyze and manage them.
What are the major types of costs, and why is each type important?
Direct vs. Indirect Costs:
Direct Costs: Easily traced to a cost object (e.g., raw materials, direct labour).
Indirect Costs: Not directly traceable, allocated via overhead rates (e.g., utilities, rent).
Fixed vs. Variable Costs:
Fixed Costs: Remain constant regardless of production levels (e.g., rent, salaries).
Variable Costs: Change in proportion to activity (e.g., raw materials, direct labour hours).
Semi-variable Costs: Contain both fixed and variable elements.
Importance: Differentiating these helps in budgeting, pricing, cost control, and profit analysis.
What are the elements of manufacturing costs?
Direct Materials: Raw materials that become an integral part of the finished product.
Direct Labour: Wages of workers directly involved in manufacturing.
Manufacturing Overhead: All other production costs (both indirect materials and labour, utilities, depreciation) that cannot be directly traced to the product.
Nonmanufacturing Costs: Expenses not related to production, such as selling, distribution, and administration costs
What is a cost sheet (or cost statement) and why is it important
Cost Sheet/Cost Statement: A detailed report that aggregates all cost elements to determine the total production cost.
Importance:
Assists in pricing decisions and profitability analysis.
Provides a basis for cost control and efficiency improvements.
Helps in comparing actual costs against budgeted/standard costs for performance evaluation.
What is cost estimation, and what are its primary methods?
A:
Meaning: Cost estimation is the process of predicting the cost required to complete a project or produce a product.
Methods:
Non-mathematical:
Engineering Method: Uses technical specifications and design factors.
Accounts Analysis: Review of historical cost data and records.
High-Low Method: Uses the highest and lowest activity levels to estimate variable cost per unit.
Mathematical:
Scatter Graph: Plots historical data to observe the relationship between variables.
Ordinary Least Squares (OLS) Regression (Simple Linear Regression): Statistically estimates the best-fit line through data points to predict future costs.
What is meant by materials costing and what are its main components?
Materials Costing: The process of accounting for the cost of raw materials used in production.
Components:
Purchasing Cost: Price paid to acquire raw materials.
Handling and Storage Costs: Expenses related to receiving, storing, and issuing materials.
Wastage and Scrap Costs: Costs arising from material losses during production.
What are the objectives and procedures of materials control?
Objectives:
Ensure material availability while minimizing holding costs.
Prevent wastage, theft, or obsolescence.
Maintain quality and timely supply of materials.
Facilitate accurate cost accounting and efficient production planning.
Procedures:
Purchasing: Identifying, evaluating, and ordering materials from suppliers.
Issuance: Delivering materials to production as needed while tracking their usage.
Storage: Proper handling, safekeeping, and maintenance of inventory to minimize losses.
What documents are essential in materials control?
Materials Requisition Note: Authorization for materials issuance from storage to production.
Bill of Materials: A detailed list of raw materials required to produce a product.
Goods Received Note: Confirms the receipt and condition of purchased materials.
Delivery Note: A document issued when materials are dispatched, verifying delivery to the recipient.
Materials Returned Note: Records materials returned back to storage from production or due to quality issues.
Materials Transfer Note: Tracks the movement of materials between different storage locations or departments.
What techniques are used for inventory control, and what are the merits and demerits of each?
Economic Order Quantity (EOQ):
Advantage: Minimizes total inventory costs by determining the optimal order size.
Limitation: Assumes constant demand and lead time, which may not always be realistic.
Control Level: Setting minimum and maximum stock levels to trigger reordering.
Advantage: Prevents stock-outs and overstocking.
Limitation: Requires constant monitoring and may be inflexible.
Just in Time (JIT):
Advantage: Reduces inventory holding costs by receiving goods only when needed.
Limitation: Vulnerable to supply chain disruptions.
ABC Analysis/Pareto Analysis:
Advantage: Prioritizes inventory management focus on high-value items (typically 20% of items contributing to 80% of value).
Limitation: Requires thorough data analysis and regular updating.
Inventory (Stock) Turnover Ratio:
Advantage: Measures inventory efficiency by determining how many times stock is cycled during a period.
Limitation: High turnover might indicate insufficient inventory to meet demand.
FSN Analysis (Fast, Slow, Non-moving):
Advantage: Helps optimize stock levels by categorizing items based on movement frequency.
Limitation: Data-intensive and may require regular reclassification.
What are the merits and demerits of continuous (perpetual) versus periodic inventory counting methods?
Continuous Inventory (Perpetual System):
Merits: Provides real-time inventory data; better for monitoring fast-moving items.
Demerits: Can be costly to implement and maintain; requires integrated IT systems.
Periodic Inventory Count:
Merits: Simpler and less expensive to administer.
Demerits: Only provides snapshot data; may lead to inaccuracies between counts.
How are FIFO, weighted average, and LIFO methods used in inventory valuation, and what are the pros and cons of each
FIFO (First In, First Out):
Advantages: Reflects current market prices; reduces likelihood of obsolete stock.
Disadvantages: Can lead to higher taxes during periods of inflation.
Weighted Average:
Advantages: Smooths out price fluctuations; easy to compute.
Disadvantages: May not clearly represent the actual flow of goods.
LIFO (Last In, First Out):
Advantages: May reduce tax liabilities during inflation by matching recent higher costs with current revenues.
Disadvantages: Can result in outdated inventory values and is not accepted under certain accounting standards.
How is accounting for material losses performed
Recording Losses: Material losses are recorded by comparing physical counts with book inventory.
Adjustment Entries: Losses are adjusted in the cost accounts, often classified as abnormal or normal losses.
Impact Analysis: Material losses affect overall cost of production and must be analyzed to identify causes (e.g., spoilage, theft, inefficiency).
Control Measures: Implementing stricter material control and inventory management systems helps reduce future losses.
