Cost classification
Cost classification involves:
Cost terms
High low method
Coding
Classification of costs - Element, behaviour, nature, function
Analysing costs
The word ‘cost’ is used in two contexts:
The Cost of an item
To cost an activity - how much something cost us to do
Responsibility accounting
Responsibility accounting is based on identifying individual parts of a business which are the responsibility of a single manager.
Responsibility accounting - Cost Centre
A cost centre is a responsibility centre that incurs costs only
Responsibility accounting - revenue centre
A revenue centre is a responsibility centre that is devoted to raising revenue
Responsibility accounting - Profit Centre
If a manager is responsible for revenue as well as costs, the responsibility centre is a profit centre.
Responsibility accounting - investment centre
This is when a manager is responsible for investment decisions and revenue and costs. As it includes revenues and costs it is (manager) responsible for profit, additionaly, it controls assets meaning that the manager is judged on metics like ROI, ROCE.
Cost Terms
Cost centre - this groups costs by department, activity, function
Cost object - anything for which a cost can be ascertained. E.g a product, service, activity.
Cost unit - Unit of product or service which costs are ascertained. E.g Per hour of labour, Per sale (costs involved in sales divided by amount of sales)
The cost card
A cost card is used to show the breakdown of the costs of producing output based on the classification of each cost.
A cost card includes:
Direct material
Direct Labour
Direct expenses
PRIME COST (Total of direct costs)
Variable production overheads
TOTAL VARIABLE PRODUCTION COST (Total of Prime cost and variable production overheads)
Fixed production overheads
TOTAL PRODUCTION COST (Total Variable production cost and fixed production costs)
Non - production cost
TOTAL COST (Total Production cost and non production cost)
Classifying costs
There are four main classifications:
Nature - Indirect, direct
Element - identifying costs into different sections - materials, labour, expenses
Function - What part of the business the cost is incurred for - Production or non production. Production costs are also included in the valuation of inventory.
Behaviour - How costs change based on activity - Fixed costs, variable costs, semi variable costs, stepped fixed costs
Stepped fixed costs
This is a type of fixed cost that is only fixed within certain levels of activity. Once the upper limit of an activity is reached then a new higher level of fixed cost becomes relevant.
Example - warehouse rent £10,000/month and has a capacity of 2,000 units. If the business increases to a capacity over 2,000 units they will need to add a new warehouse which will increase the warehouse rent.
Semi variable cost
A semi variable cost is a cost containing both fixed and variable components and therefore partly affect by a change in the level of activity.
Example - electricity, this has a standing charge and a charge per unit.
High low method
This method is used to slip semi variable cost into their fixed and variable components.
The high low method calculates this by picking out the highest and lowest activity levels.
To calculate the variable cost - Change in cost respective to high and lowest activity levels / change in activity. This gives the variable cost per unit.
To get the total variable cost you would times the variable cost per unit into the low activity level (or high).
To get the fixed cost you would subtract the total cost at the lower activity level (or high) from the total variable cost at the lower activity level (or high).
High low method with stepped fixed costs.
Choose two activity levels where the fixed costs remain unchanged and calculate the variable cost per unit and the total fixed cost using the high/low technique.
High low method with changes in variable cost per unit
Choose activity levels where the variable cost per unit remain unchanged. (Same with stepped fixed costs).
Cost equations - Equation of a straight line
Y = a+bx
Y = dependent variable (TC)
A = intercept on y-axis (FC)
B = gradient of the line (VC Per unit)
X = independent variable (Q)
Cost codes
A Cost code is a system of symbols designed to be applied to a classified set of items.
Example - a cost code DM-001 tells you what the cost relates to, in this case it would be direct materials (DM) and the 001 would be the specific material - e.g steel.
