Flashcards in Chapter 1 Cost Behaviour Deck (31)
What are the types of costs?
Stepped fixed cost
Semi variable (mixed) cost
How do variable costs behave?
Vary with level of activity
Assumes cost per unit is constant
Can be traced to each unit of production
How do fixed costs behave?
Do not change with level of activity
Cost is incurred for a time period
Example: Rent on premises
How do step fixed/semi-fixed costs behave?
Fixed for a range of activity
Step up once next range is reached
Example: Supervisor cost, 1 super per 10 employees.
How do semi variable(mixed) costs behave?
Contain both fixed and variable cost elements
Partially effected by changes in activity level
Example: Phone bill with line rental and call charges
How are the fixed and variable components of semi variable costs calculated?
1. Calculate the difference in activity and cost between lowest and highest activity
2.Variable cost per unit is cost difference/activity difference
3. TC=FC+(VC per unit x volume of production)
How can the fixed and variable costs be calculated fir step fixed costs?
Use the high-low method as with semi variable costs
Apply the method to two activity levels on the the same side of the step
What other ways are there of classifying costs?
Capital v Revenue expenditure
Cost by function i.e Production and non production costs
By Element - Materials, Labour and expenses
By Nature - Direct(traceable) and indirect (Shared)
What is a cost Center
A Collecting point for costs
Could be a location or function
Costs for the Center must be able to relate to the cost units being produced.
What other type of responsibility Center are there?
Revenue Center - Where manager has control over revenue only
Profit Center - Where manager controls both costs and revenues
Investment Center - Similar to first two but manager is also responsible for investment decisions
What are the steps in absorption costing?
1. Allocate direct costs directly to cost units
2. Allocate indirect costs that relate to a single cost Center
3. Apportion indirect costs that relate to several cost centres on an appropriate basis.
How is Overhead Absorption rate calculated?
OAR = Production Overhead/Activity Level
How is the appropriate activity level for calculating OAR decided on?
Cost per unit - all units produced are identical
Cost per labour hour - were many different products are made using mostly manual processes
Cost per machine hour - Where many different products are made using mostly machine processes
What is marginal costing?
Marginal costing only includes variable production costs on the cost card.
Fixed production costs are attributed to the relevant period
What is activity based costing?
Where overheads of a cost Center are split in to cost pools and then absorbed using different cost drivers
What is breakeven analysis?
This is done in relation to marginal costing to establish the activity level the business must reach to “break even” .i.e. make no profit or loss
How is the break even point in units calculated?
Volume of Sales to break even=
Fixed costs/ Contribution per unit...
Contribution is Selling price less variable cost
What is limiting factor analysis
This is where the limiting factor is identified and then and optimal production plan created
How is limiting factor analysis approached?
1 Identify the limiting factor
2 Calculate the contribution per physical unit
3 Convert 2 in to contribution per unit of limiting factor
4 rank products according to result from 3 and plan production from there.
What is a future cost?
A future cost will be incurred in the future as the result of a business decision
It cannot be a cost already occurred or that would be incurred irrespective of the business decision.
What is an Incremental cost
This is a cost which would be avoidable if the decision were not implemented.
E.g. Advertising budget for a new product, if the product was not launched the cost would not be incurred.
Incurred and out flow of cash from the business and is not an accounting transaction
E.g. Purchase of new machinery not depreciation of machinery.
What is the purpose of NPV (Net Present Value) analysis?
To establish to present value of cost to the business that will Be occurred in the future by using Discounted cash flows (DCF)
What are discount factors and how are they used?
These are figures that take in to account the time value of money and are expressed as decimals.
Multiply cash flow by discount factor to get the Net present value.
What is the business use of NPV Analysis?
This can be used to decide on investment or to make a lease/buy decision.
If NPV is positive the investment will be profitable.
What is Net terminal cost?
This is where a project is looked at in terms of cost at its end point instead of the start.
Costs are compounded instead of discounted.
What is target costing and what other terms may arise in relation to this?
It is costing method which works out the maximum allowable cost of a product from the sales price and profit margin required.
It may be referred to in relation to Value engineering and value analysis.
What is the line of best fit or regression equation?
May also be referred to as least squares regression line.
Where y is total costs incurred
X - the production volume achieved
A - fixed cost regardless of output
B - variable cost per unit
What are the two models that can be used to combine trend and seasonal variation?
Additive - TS=T+SV
Multiplicative - TS=TxSV
T is trend and SV is seasonal variation.