Management accounting week 2 - cost behaviour
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- Created by: jmf00632
- Created on: 19-02-20 12:02
What does cost behaviour cover?
- whether a cost is fixed, semi variable, variable and how we calculate it and supply the techniques to find the difference between them
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accounting managers are concerned...
with the provision of information to help with their decision making
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5 aspects of financial accounting....
External use, We need to abide by accounting standards when completing financial statements, Statutory requirements, Nonspecific info, They provide historical info
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Definition of cost
Depends on the context of use
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classifying cost
we can classify it through the relationship to the cost object e.g. if it is cost object we can classify the cost as direct or indirect
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define cost object
any activity for which its separate measurement of cost is desired e.g. a job is a cost object – it will either be direct or indirect
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direct cost defined as
traced directly to the object / production e.g. direct labour, expense
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The combination of all direct cots is also known as
prime costs
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Indirect cost defined as and also known as...
cannot be traced in full to the cost object. Also known as an overhead –
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non- production costs is defined as...
not assigned to the product produced – treated as an expense – not included on the inventory – they are written off in the income statement / profit and loss
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non production costs can also be known as....
period costs
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product cost will therefore only include...
direct production cost and overhead e.g. labour
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production cost can also be known as....
Manufacturing costs
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why we have to work out the cost of a product - 5 reasons
1. to ascertain the cost of goods 2. inventory valuation 3. helps managers to establish a selling price – 4. profitability analysis 5. plannig, decision making, control and performance evaluation
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costs are classified by (4)
• fixed • variable • semi variable • stepped fixed
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cost classification definition
• Cost classification is the arrangement of cost items into logical groups. - they are classifed according to how they behave
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examples
• For example: by their nature (materials, wages etc.); or function (administration, production etc.).
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cost unit definition
• A cost unit is a unit of a product or service to which costs can be established. - a unit means one
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cost unit example
• Guest per night in a hotel, Patient episode in a hospital, etc e.g. bus journey e.g. for a laptop manufacturer one laptop is one unit
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cost behaviour definition
• Cost behaviour is the way in which costs are affected by changes in the level of activity, usually the volume of output.
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fixed costs are....
costs that remain unchanged at all levels of activity within the relevant range of activity. – HOWEVER TOTAL FIXED COSTS AND UNIT FIXED COSTS ARE DIFFERENT
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unit fixed costs....
changes inversely • fixed cost per unit does not stay fixed – it will change if production is increased or decreaed for example
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example of a total fixed cost...
• For example, cost of factory rent is not affected by the number of products made or sold during a period, whether 200 or only 5 items are produced/sold during a period, the rent remains unaffected
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In a graph, total fixed cost is a.....
STRAIGHT LINE AS IT DOES NOT CHANGE REGARDELSS OF HOW MANY UNITS ARE BEING PRODUCED
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In a graph, unit fixed cost....
CHANGES – AS PRODUCTION GOES UP THE UNIT FIXED COST DECREASES
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Variable cost is a cost...
THAT VARY WITH LOA (level of activity)
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unit variable cost however.....
remains fixed
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so to sum up the difference between unit variable cost and variable cost...
• Because unit cost is the same at all levels of activity, total variable cost changes at different levels of activity.
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total fixed remains the same at all levels of activity however....
fixed costs do change with passage of time as well as when the relevant range of activity has been exceeded.
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stepped fixed costs is when....
fixed costs have acceded the relevant range, fixed cost does increase but increases in steps up until the next relevant range fixed cost does also increase with passage of time
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Example of a stepped fixed cost...
One supervisor who can supervise up to 10 units of the product so up to 10 units the cost will be 100 but the business wants to produce more unit then they need to employ more supervisor – so the fixed cost will increase e.g. 10, 20,
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the term relevant range is...
used to refer to the output range at which the firm expects to be producing within a short term horizon. it broadly represents the output level that the firm has experience of operating in the past and to which cost info is available.
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Semi Variable cost means.....
part of that cost is fixed and part of it is variable
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semi vairable cost example -
telephone - you had to pay a monthly payment regardless of how many calls you make and then you had to pay an additional variable cost depending on how many calls you made
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in other words semi variable costs.....
comprise both the fixed element and the variable element.
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why we analyse semi variable costs....
WE WANT TO FIND OUT HOW MUCH OF THE COT IS VARIABLE AND HOW MUH IS SEMI VARIABLE
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• There are different ways used to determine the individual elements of a semi-variable cost. The 2 main ones are:
high low method and Regression analysis
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we will be mostly using...
high low meathod
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however, both these methods are.....
ONLY AN ESTIMATE
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The high low meathod consists of......
• This method consists of selecting the periods of highest and lowest activity levels and comparing the changes in cost that result from the two levels
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• Adopt the following steps below to estimate the fixed and the variable elements of the semi-variable cost. (1)
• Fixed cost = Total cost of selected LOA – (Variable cost per unit * selected LOA)
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Adopt the following steps below to estimate the fixed and the variable elements of the semi-variable cost (2)
• Total costs = Total fixed costs + (Variable costs × Activity level)
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TVC =
VARIABLE COST PER UNIT X THE LEVEL OF ACTIVITY
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VARIABLE COT PER UNIT=
Cost at highest LOA – Cost at lowest LOA / Highest LOA – lowest LOA
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REGRESSION ANALYIS IS BAED ON
• This is based on the assumption that total costs move like a straight line in relation to level of activity. Therefore the relationship of the two variables, level of activity and total costs, follows a straight line equation
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Y = a+ bX where:
Y= total cost X= level of activity (usually number of units) A= Fixed costs B= Unit variable cost (available cost per unit)
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A and B values are calculated by.....
using a formula and then substituted back in the equation. This equation can then be used to find the value of cost for any level of activity.
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Other cards in this set
Card 2
Front
accounting managers are concerned...
Back
with the provision of information to help with their decision making
Card 3
Front
5 aspects of financial accounting....
Back
Card 4
Front
Definition of cost
Back
Card 5
Front
classifying cost
Back
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