Managment Accountancy

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What are Cost Objects?
Accoutning systems collect costs according to what a specifc business needs to know the cost of. For example: a product, a service, a department. A cost object may have costs from several costs and several types of costs attributed to it.
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What is Cost Classification?
Before deciding how to, or if to allocate costs to products, services or department, the cost classification, or type of cost needs to be understood.
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What is a Direct Cost?
A cost that can be attributed full and unequivocally to a cost object, for example: raw material cost of a product, salary cost of a production department....
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What is an Indirect Cost?
A cost that cannot be attributed fully and unequivocally yo a cost object.
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Examples of a Indirect Cost?
Rent on a factory that makes a range of products, it is indirect for the individual products... Cost of a computer system used by a number of departments
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What are Manufacturing Costs?
Direct Materials - Prime Cost, Direct Labour -Prime cost and Conversion Cost and Manufacturing Overheads - Conversion Costs
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What are Non-Manufacturing Costs?
Administrative Overheads and Markting overheads (order-getting and order-filling costs)
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Define Direct Materials
Material, purchased from an outside supplier, that can be atributed fully and unequivocally to a product, I.E. raw materials
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Define Direct Labour
Wages (and associated costs) paid to employees directly concerned with converting raw materials into finished products
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Define Direct Expense
Overheads or expenses associated with manufacturing
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Define Prime Costs
The total of all direct costs
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Define Indirect Materials - Indirect Materials
Material, purchased from an outside ssupplier, that cannot be attributed fully and unequivocally to a product e.g. oil for machines that make a variety of products, cleaning materials
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Define Indirect Labour - Indirect Materials
Wages (and assoicated costs) paid to employees not directly concerned with converting raw materials into finished products e.g. maintenacne workers
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Define Indirect Expense - Indirect Materials
An indirect cost that is neither material nor labour e.g. factory rent
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Define Full Factory Cost
The total of all direct and indrirect manufactuing osts
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Equation for Prime Costs
Direct Materials + Direct Labour = Prime Costs
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Equation for total manufacturing overheads
Indirect materials + Indirect Labour + Expenses = Total Manufactuing Overheads
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Equation for Full factory cost
Prime Costs + Manufacturing Overheads = Full Factory Cost
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Define Administration - Non-Manufacturing Costs
The cost of providing the organisation's infrastructure e.g. telephone system, computer system, finance department, human resources, property management, seniour management team...
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Define Sales and Marketing - Non-Manufacturing Costs
Costs incurred in promoting, selling and distributing products (and services) e.g. advertising, sales department salaries, delivery costs....
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Define Product Cost
Associated to products sold to customers by manufacturing or merchasing or merchandisign firms. Appears in inventory value and cost of sales. - Manufacturing costs that become an expense when the product is sold.
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Define Period Costs
Arises by virtue of the passing of time rather than manufacturing (or purchasing) a product for sale. Does not appear in inventory value or cost of sales. - Non-manufacturing costs that are treated as an expense in the current accoutning period.
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Define Cost Behaviour
Some costs change as the result in changes in the level of activity in an organisation, and some do not. some types of cost behaviours are; Variable costs, Fixed costs, Semi-Fixed and Semi-Variable
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Define Variable Costs
Total variable costs are directly propoertional to the level of activity e.g. direct material cost. The variable cost per unit is constant
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Define Fixed Costs
Total Fixed Costs are constant at all levels of activity e.g. factory rent.
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Define Semi-Fixed Costs
Total fixed costs are constant within a given activity range, but change to a new constant level outside this range, e.g. factory rent.
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Define Semi-Variable costs
Total cost is comprised of a fixed element and a variale elemenet, e.g. wage plus production bonus.
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Define Relevant Costs
A future cash cost that will change as the result of making the decisions. Should be taken into account in decision-making
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Define Irrelevant Costs
Does not meet all of the criteria for a relevant cost. This should not be taken into account in decision-making
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Define Sunk Cost
A cost that has already been spent and cannot be 'unspent'. It is an irrelevant cost for decision-making.
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Define Incremental Cost
The additional cost incurred as the result of pursuing one alternative rather than another e.g. increasing the activity level. May include both variable and step costs.
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Define Marginal Cost
The extra cost of increasing activity by one unit. Synonymous to variable cost to accountants.
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Define Opportunity Cost
The cost of the benefit lost by selecting one course of action instead of another. E.G. Scarce Raw Material. The opportunity lost when taking a certain course of action
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Card 2

Front

What is Cost Classification?

Back

Before deciding how to, or if to allocate costs to products, services or department, the cost classification, or type of cost needs to be understood.

Card 3

Front

What is a Direct Cost?

Back

Preview of the front of card 3

Card 4

Front

What is an Indirect Cost?

Back

Preview of the front of card 4

Card 5

Front

Examples of a Indirect Cost?

Back

Preview of the front of card 5
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