Section B: Costing Flashcards
What is a cost centre/unit/object?
Cost centre: A collecting place for costs before they are further analysed.
Cost unit: A unit of product or service to which costs can be related.
Cost object: Anything a user of accounting information wants to know the cost of.
What is economic cost vs value?
Cost: What could have been accomplished with the resources used in the course of action not chosen.
Value: The most someone is willing to give up in £ to obtain a product or service.
How are costs classified?
Nature: Material, Labour Expenses
Function: Production costs, Admin Costs, Selling costs
Behaviour: Fixed, Variable costs.
Responsibility: Who is responsible for the cost.
What are direct vs indirect costs?
Direct Cost: A cost that can be traced in full to the product, service or department that is being costed. (Prime Cost)
Indirect Cost: A cost that cannot be traced directly to the product, service or department. (Overhead)
What are the types of relevant cost?
Avoidable cost: A cost that would not be incurred if the activity did not exist.
Differential cost: Relevant difference in the cost of alternatives.
Controllable cost: Item of expenditure which can be directly influences by a given manager
Opportunity cost: The benefit which would have been earned but which has been given up, by choosing one option instead of another.
Relevant Cost of labour: The direct labour cost plus the contribution lost by diverting labour to make another product.
What are the types of non-relevant cost?
Sunk Cost: A past historical cost which is not directly relevant in decision making.
Fixed Cost: Assume fixed costs are irrelevant and variable costs are relevant.
What is the basic principle of cost behaviour?
As the level of activity rises, costs will usually rise.
What are fixed / stepped / variable & semi-variable costs?
Fixed: Costs unaffected by increases/decreases in activity level. (Rent of a factory)
Stepped: Fixed within certain ranges of activity levels. (Software licence fees)
Variable: Costs that vary directly with the level of activity. (Direct production costs)
Semi Variable: Cost that contains both fixed and variable elements. (Telephone bills)
How to use scatter graph method to split out semi-variable costs?
Step 1: Plot data on scattergraph.
Step 2: Add a line of best fit.
Step 3: Fixed cost = Where line of best fit intersects Y axis.
Step 4: Variable cost per unit = (Total cost - Fixed Cost)/Activity level.
How to use High-Low method to split out semi-variable costs?
Step 1: Select periods with highest and lowest activity levels.
Step 2: Variable cost per unit = (High cost - Low cost / (High activity - Low Activity)
Step 3: Fixed costs = High cost - (Variable cost per unit * High activity level)
Step 4: You can now substitute in any activity level to predict total cost.
What is correlation & How to interpret results?
The extent to which the value of a dependant variable is related to the value of the independent variable.
R = 1 = Perfect positive correlation
R = 0 = No correlation
R = -1 = Perfect Negative Correlation.
What is the coefficient of determination?
R^2 tells us the proportion of the total variation in one variable that can be explained by variations in the value of the other variable.
What is allocation? & Examples?
Allocation is the process by which whole cost items are charged directly to a cost unit or centre. Eg, Cost of Security guard charged to Warehouse cost centre.
How do we apportion overheads?
1: Identify what type of overhead. (Production, service, distribution etc)
2: Apportion the service cost centre o/heads to production cost centres (Reapportionment)
Eg, Rent and rates shared out across cost centres based on floor area.
What are the basis of absorption?
Unit
Direct labour hours
Machine hours
