Cost Classification & Behaviour Flashcards
(29 cards)
Cost Classification definition
arrangement of cost items into logical groups by function or nature.
Eventual aim to determine cost of producing product or service
What are the ways to classify costs by function for production costs?
Production Costs
- costs associated with production of goods/services
- from raw materials up to end of process
- Materials used
- Labour Cost
- Overheads required to support production
What are the ways to classify costs by function for non- production costs?
Non- Production Costs
- all other costs incurred in business
- Administration- managing organisation
- Selling- promotion
- Distribution- packing & delivery
- Finance - interest on loans & staff
What does determine cost of producing a product or service help with?
- profitability analysis
- selling price determination
- Inventory valuation purposes
Direct Cost
- cost can be traced in full to product service or department that it is being costed to
Direct Materials
Materials incorporated into finished product or providing service
- wood for table
- shampoo for hairdresser
Direct Labour
Wages paid to workers who make products or perform service
- machine operators
- hairdressers
Direct Expenses
incurred as direct consequence of making product or providing service
- patent royalties
- fairly rare
Prime Cost =
= direct materials + direct labour + direct expenses
Indirect Costs
incurred in course of making product/service but can’t be identified with particular cost unit
- indirect production costs = production overheads
Indirect Materials
used in production process but not incorporated into product
- lubricants
Also insignificant costs attributable to each unit can be included for convenience
- nails/glue
Indirect Labour
wages and salaries of other staff
- supervisors
- storekeepers
- maintenance workers
Indirect Expenses
- not spent on individual units of production
- rent/rates/elec/telephone
Cost Behaviour
- way in which costs affected by changes in volume of output
- needs to know whether increases or decreases with production
- depends on nature of the cost
Fixed Cost Behaviour
tends to be unaffected by increases or decreases in volume of output
- period chrg, relate to span of time
Flat line on graph as cost stays same as volume of output increases
- rent of factory building
- straight line depn
Variable Cost Behaviour
tends to vary with volume of output
on graph constant rate increasing
- price per unit and rate of usage is constant
- cost of raw materials
- direct labour costs
- sales commission
Stepped fixed cost behaviour
- fixed in nature but only within certain levels of activity
- looks like steps
- rent as when accommodation requirements increase, output levels get higher
- cost certain amount to rent 1 factory but once need two take a step up
Semi Variable Cost Behaviour
semi-fixed
semi-mixed
- contains both fixed & variable components so is partly affected by changes in level of activity
Constant line increasing on graph but doesn’t start of origin on y axis- starts at level of fixed costs
- elec/gas bills with standing chrg & then charge per unit used
- salary with commission for sales made
What is the equation of a line that can help find total costs when variable & fixed costs involved?
y = a + box
y - dependent variable
x - independent variable
a - intercept on y axis
b - gradient on line
Total Cost = Fixed Cost + (variable cost x output)
Cost Object
Anything for which cost data is desired
- products
- jobs
- departments
- service
Cost Unit
- unit of product or service in relation to which costs may be ascertained
- should be appropriate to type of business
car manufacturer- car
management consultant- project
Cost Centre
- location/function/item of equipment in respect of which costs may be ascertained and related to costs units for control purposes
- collecting place for certain costs to then be further analysed
What are the two types of factory cost centres?
production cost centres- cost units will actually flow
- machining
- finishing
- packing
Service cost centres- support/service production cost centres
- canteen
- maintenance
- stores
