What is a Cost Object?
The cost of a batch of cost units.
What are the three types of responsibility centre?
Cost centre; Profit centre; Investment centre.
What is a cost centre?
A place (mostly), product or person to which costs are allocated.
Into which three elements are Costs broken down?
Materials Labour Expenses
What are Material Costs?
Costs related with the purchase of anything tangible e.g. raw materials, stock or goods to be used within the business (such as stationery).
What are Labour Costs?
All and every Cost related to employing staff e.g. bonuses and maternity leave and employer's tax deductions. NB: payment of people who are not your employees (not in your payroll) is not classified as Labour Costs.
What are Expenses Costs?
Costs incurred in keeping the business running e.g. Overheads, cleaning services or security. In general, anything that doesn't fall into either of the other two categories.
What is the difference between cost centres and profit centres?
While cost centres normally have no income (as sales revenue), profit centres will have income as well as costs. Profit : Income - costs N.B. admin offices, for example, can only be cost centres as no sales are made. No sales, no profit centre.
What is the relationship between profit centres and investment centres?
Investment centres are areas of the company in which investment was made and the profit of that area of the business is compared with the cost of the investment. i.e. profit/investment : return on investment
What should be noted in relation to expenses?
It has different meanings in financial accounting and management accounting.
What are the two natures of costs?
Direct Costs Indirect costs
What are Direct Costs?
Costs directly associated with each product being sold.
Which three criteria must be satisfied for a Cost to Direct?
1 - It must be essential for preparing the good (or services) for sale. If the item can be prepared and sold without a given cost, than that is not a Direct Cost. Includes labour in contact with the product. 2 - It must apply to each and every item produced; so overtime costs are divided into two parts: basic pay (direct cost) and overtime premium (indirect cost). 3 - The cost must be identifiable (certain) in advance.
What is a fourth condition for Costs to be direct that some businesses will apply?
The cost must be non-negligible. If it is small, let it go.
What are indirect costs?
Costs not associated with any particular product; and costs which are negligible. Negligibility is subjective from company to company. Indirect labour related to employees who do not make the products. Indirect expenses are called overheads. These are expenses which are not directly associated with the production.
Which four behaviours can costs be classified into?
Variable Semi-Variable Stepped Fixed
What are variable costs?
Costs that change in direct proportion to the number of units of output.
What are fixed costs?
Costs which don't change with the variation of units of output e.g. rent.
How will a variable costs graph look like?
It will start at origin and have a y=mx+b format i.e. positive slopping straight line. b is the y-intercept and since the curve starts at origin b is 0. m is the slope or the unit of output price. So, for variable costs y=mx
How will a fixed costs graph look like?
The curve will be flat across the graph. y=mx+b where the m is 0.
Is employees' pay a variable or fixed cost?
Basic pay is a fixed cost but it becomes semi-variable if commission or overtime are paid.
Is Depreciation a fixed or variable cost?
Because it is based on the value of the asset and not on the number of assets produced (most times), it is considered a fixed cost.
What is a semi-variable cost?
A cost which has an element of both fixed and variable in it. Graph will look like the variable costs one but without starting at the origin.
How is the tot variable cost of a semi-variable calculated?
Total Cost - Fixed Cost = total variable cost
Which method is used when only the total cost of a semi-variable cost is known?
The high/low method.
What is the high/low method?
To use this method info about at least two periods must be had. Difference in cost/Difference in units=variable cost per unit Or slope=variable cost per unit
What are Stepped Costs?
When the cost is fixed up to a certain level and then fixed again up to another level.
Give examples of variable costs.
The materials used in making a product For a delivery business or bus company, the cost of the fuel for the vehicle For a restaurant, food ingredients; serviettes. Commission paid to Sales staff The cost of the wages of production staff Credit card fees
Give examples of fixed costs.
Council Tax Advertising Director's salaries Electricity (usually) Leased equipment charges Software Depreciation (in almost all cases)
Give examples of semi-variable costs.
Sales staff paid a commission plus a flat rate. Hiring a vehicle with a flat charge plus mileage charge Telephone costs in a retail business Metered electricity for the production machines.