Cost Classification And Materials Cost Flashcards

(13 cards)

1
Q

What do the terms cost, cost unit, cost centre, cost object, cost objective, cost behaviour, and cost classification mean

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the major types of costs, and why is each type important?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the elements of manufacturing costs?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a cost sheet (or cost statement) and why is it important

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is cost estimation, and what are its primary methods?
A:

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is meant by materials costing and what are its main components?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the objectives and procedures of materials control?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What documents are essential in materials control?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What techniques are used for inventory control, and what are the merits and demerits of each?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the merits and demerits of continuous (perpetual) versus periodic inventory counting methods?

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How are FIFO, weighted average, and LIFO methods used in inventory valuation, and what are the pros and cons of each

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How is accounting for material losses performed

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q
A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly