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Cost Classification Behaviour and Estimation - Coggle Diagram
Cost Classification Behaviour and Estimation
What is Costing
Total Cost
incurred by a company can be
categorised into two broad categories
Manufacturing Costs
:star:
Product Costs
Direct Materials
Prime Cost
Direct Labour
Prime Cost and Conversion Cost
Manufacturing Overheads
Conversion Cost
Non-Manufacturing Costs
:star:
Period Costs
Marketing and selling costs
Administrative Costs
Is a system for
assigning costs
to any element of a business that includes:
Statement of financial position
Inventory
Raw materials
Opening Balance
+
Purchases
=
Available for use
-Closing Balance
=
Raw materials used in production
:star:
Work-in Progress
Opening Balance
+Raw materials used in production
:star:
+Direct labour
+Manufacturing overheads
=Total manufacturing cost
-Closing balance
1 more item...
Finished goods
+Cost of goods manufactured
:<3:
-Closing balance
Cost of goods sold
Opening balance
Cost Classification for assigning cost to cost objects
how cost will react to changes in the level of business activity
Variable Costs
Accounted for on the income statement as
Cost of Goods sold
, which is
subtracted from revenue to determine :star:Gross Profit
Important in determining
the breakeven point of a busines
, which is the
level of sales at which the busines covers all of its costs
Can be
used to calculate :star:contribution margin
, which is the
amount of revenue left over after variable costs are subtracted
, and is used to cover fixed costs and generate profit
Expenses that
vary in proportion to the level of output
or
activity
of a business
Increase or decrease as production or sales levels change
Direct Labour
Sales Commission
Direct Materials
Semi-Fixed Costs
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Mixed Costs/Semi-Variable
Contains both variable and constant cost elements
Includes both the
fixed cost element
that
does not vary with changes in production or sales volume
and a
variable cost element
that
increases or decreases as production or sales volume changes
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Examples
Telephone bill
Vehicle expense
Can be
separated into their fixed and variable components
using statistical methods such as
regression analysis
or the
high-low method
Cost Classification
Direct costs
can easily and conveniently be trace back to the cost object
Indirect costs
Cost can't easily and conveniently be traced back to the cost object
Behaviour of Cost
Variable
In Total
Total Variable Cost
Changes as
activity level changes
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Per Unit
Variable cost per unit
remains the same
over wide ranges of activity
Fixed
In Total
Total fixed costs
remain the same even when the activity level changes
Per Unit
Fixed Cost
per unit goes down as activity level goes up
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Cost Classification for Decision Making
Sunk Cost
A
cost that has already incurred and cannot be changed by any decision
made now or in the future
Opportunity Cost
The
potential benefit that is given up
when one alternative is selected over the other
Every decision involves
choosing between at least two alternatives
Only costs and benefits
that differ between alternatives
are
relevant in making the selection
Differential cost and revenue are the
cost and revenue items
that
differ between alternatives
A
Differential Cost
is a
cost that is different between two decisions
Another Important Formula
Work in Progress ending balance
— Direct Material Cost
— Direct labour Cost
=Overhead
Financial Statements Treatment for Costing
Product Costs:
Treated as
Inventory Costs
Initially
recorded on the balance sheet as an asset
in the form of
:star:Inventory
Only
expensed
when the
finished product is sold
Expensed to
:star:cost of goods sold
when the inventory is sold in
The Statement of Profit or Loss
Period Costs:
Expensed
as
they are
incurred
R
ecorded directly on the income statement
in the period they are incurred
Since they
not related to the production of goods
They are
subtracted from revenue
to determine the company's net income or loss
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Cost Estimation
Cost Estimation Techniques
1. The Linear Equation
A "
straight line equation
" that would represent our total cost
Can be represented using the equation Y = a + bX
X
represents the level of production or sales volume
b
represents the
variable cost per unit
a
represents the
fixed cost
(
Per period
)
where
Y
represents the
Total Cost
TC = FC + VC
We get "Mixed Cost", if there's a value for
Fixed
and
Variable Cost
2. The scatter diagram
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3. High-Low Method
y= mx+c
y = is the total cost
m = gradient
m =(
High Cost
-
Low Cost
)/(
High Activity
-
Low Activity
)
x = cost driver level
c =
Fixed cost
c =y-mx
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4. Least squares regression
To solve for the
intercept
:
c = [y - m(x)]/ n
To solve for the
gradient or slope
:
m = [n(x.y) - (x)(y)]/[n(x)^2 - x^2]
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Cost Estimation summary
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We need to identify the different types of cost (variable, fixed or mixed) of the cost object before we can apply the "Cost Estimation" techniques
Cost Objective
A cost object is a term used in cost accounting to describe
something that costs are assigned to
. Cost objects can include activities, projects, organizations, intangible assets, and other resources.
Summary
of Cost Classification
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