f202 Cost classification.docx
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f202 Cost classification.docx
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f202Costclassification
Chapter2CostClassification(4hrs)
Priority=high
ExamGuidance
Costclassificationisoneofthekeyareasofthesyllabus.
Itwillactasafoundationstonefortheotherfollowingimportantcontent,suchascostingmethod,absorptionandmarginalcosting,costbehavior,cost-volume-profitanalysis,budgeting,etc.Youwillmeettheconceptsinthischapterintheexam.
Thereisnosuchthingasafreelunch.
1.Thetotalcostincurredduringtheorganizations’operationincludes:
(a)MaterialCosts
(b)Laborcosts(wagesandsalaries)
(c)Otherexpenses
2.DirectcostsorIndirectcosts(traceability)
Acostthatcanbetracedinfullanddirectlytotheproduct,service,ordepartmentthatisbeingcosted.
Otherwise,theyareindirectcostoroverhead.
Materialcosts,laborcostsandotherexpensescanbeclassifiedaseitherdirectcostsorindirectcosts.
2.1Directcosts
2.1.1Directmaterial
Directmaterialisallmaterialbecomingpartoftheproduct(unlessusedinnegligibleamountsand/orhavingnegligiblecost).
Examples:
a)Componentparts,
b)Part-finishedwork,
c)Primarypackingmaterials.
2.1.2Directlabor
Directwagesareallwagespaidforlabor(eitherasbasichoursorasovertime)expendedonworkontheproductitself.
Examples:
Exercise:
Classifythefollowinglaborcostsaseitherdirectorindirect.
a)Thebasicpayofdirectworkers(cashpaid,taxandotherdeductions)
b)Thebasicpayofindirectworkers
c)Overtimepremium
d)Bonuspayments
e)Employer'sNationalInsurancecontributions(Socialinsurancecontributions)
f)Idletimeofdirectworkers
g)Workoninstallationofequipment
h)Shiftallowance(Shiftpremium)
i)Sickpay
Exercise:
P43
Twotrendsmaybeidentifiedindirectlaborcosts.
Normaltime
Overtime
Basicpay
Basicpay
Overtimepremium
Directworker
Directcost
Indirectcost
threeexception
a)Special(D)
b)Always(D)
c)Occasionally(I)
Indirectworker
Indirectcostunlessspeciallyforaserviceorproduct
Indirectcost
threeexception
a)Special(D)
b)Always(I)
c)Occasionally(I)
2.1.3Directexpenses(chargeableexpenses)
Directexpensesareanyexpenseswhichareincurredonaspecificproduct(service)otherthandirectmaterialcostanddirectwages.
Examples:
Primecosts=directmaterial
+directlabor
+directexpense
2.2Indirectcosts(overhead)
2.2.1Productionoverhead(factoryoverhead)
Allindirectcostsincurredintheproductionprocess(fromreceiptoftheorderuntilitscompletion).
a)Indirectmaterialcosts,
b)Indirectwages,
c)Indirectexpenses
2.2.2Administrationoverhead
Allindirectcostsincurredintheadministrationactivity(plan,direction,controlandadministrationofanundertaking).
Indirectmaterialcosts,wagesandexpenses
Salariesoffinancingdepartment
2.2.3Sellingoverhead
Sellingoverheadisallindirectmaterialscosts,wagesandexpensesincurredinpromotingsalesandretainingcustomers.
Examples:
a)Printingandstationery,suchascataloguesandpricelists.
b)Salariesandcommissionofsalesmen,representativesandsalesdepartmentstaff.
c)Advertisingandsalespromotion,marketresearch.
d)Rent,ratesandinsuranceofsalesofficesandshowrooms,baddebtsandsoon.
2.2.4Distributionoverhead
Distributionoverheadisallindirectcostsincurredinmakingthepackedproductreadyfordespatchanddeliveringittothecustomer.
Examples:
a)Costofpackingcases.
b)Wagesofpackers,driversanddispatchclerks.
c)Insurancecharges,rent,rates,depreciationofwarehousesandsoon.
Totalcosts
Directcosts
Primecosts
DirectM
DirectL
DirectE
Indirectcosts
ProductionOH
AdministrationOH
SellingOH
DistributionOH
[F2_2006_dec_ppq_28]Inanorganisationmanufacturinganumberofdifferentproductsinonelargefactory,therentofthatfactoryisanexampleofadirectexpensewhencostingaproduct.
IsthisstatementTRUEorFALSE?
(1mark)
[Answer]False
[2005_decSectionA_17]Whichoneofthefollowingwouldbeclassifiedasindirectlabour?
A.Assemblyworkersonacarproductionline
B.Bricklayersinahousebuildingcompany
C.Machinistsinafactoryproducingclothes
D.Forklifttruckdriversinthestoresofanengineeringcompany
[Answer]D
Exercise:
Amanufacturingfirmisverybusyandovertimeisbeingworked.Theamountofovertimepremiumcontainedindirectwageswouldnormallybeclassedas:
A.Partofprimecosts
B.Factoryoverheads
C.Directlabourcosts
D.Administrativeoverheads
[Answer]B
3.Functioncosts
Thecostsinamanufacturingorganizationarealwaysclassifiedasfollows.
a)Production/manufacturingcosts
b)Administrationcosts
c)Marketing/sellingcosts&Distributioncosts
d)Researchcosts&Developmentcosts
e)Financingcosts
f)Generaloverheads.
Fullcostofsales
Fullfactorycost
Primecost
Directmaterials
Directlabors
Directexpenses
Productionoverhead
Administrationcosts
SellinganddistributionCosts
Exercise:
a)Costofoilsusedtolubricateproductionmachinery
b)Motorvehiclelicensesforlorries
c)Depreciationoffactoryplantandequipment
d)Costofchemicalsusedinthelaboratory
e)Commissionpaidtosalesrepresentatives
f)Salaryofthesecretarytothefinancedirector
g)Tradediscountgiventocustomers
h)Holidaypayofmachineoperatives
i)Salaryofsecurityguardinrawmaterialwarehouse
j)Feestoadvertisingagency
k)Rentoffinishedgoodswarehouse
l)Salaryofscientistinlaboratory
m)Insuranceofthecompany’spremises
n)Salaryofsupervisorworkinginthefactory
o)Costoftypewriterribbonsinthegeneraloffice
p)Protectiveclothingformachineoperatives
[F2_2006_dec_ppq_17]Amanufacturingorganisationincurscostsrelatingtothefollowing:
(1)Commissionpayabletosalespersons.
(2)Inspectingallproducts.
(3)Packingtheproductsattheendofthemanufacturingprocesspriortomovingthemtothewarehouse.
Whichofthesecostsareclassifiedasproductioncosts?
A
(1)and
(2)only
B
(1)and(3)only
C
(2)and(3)only
D
(1),
(2)and(3)
(2marks)
[Answer]C
4.Classificationbybehavior(therelationshipwithactivitylevels)
4.1Fixedcosts
Afixedcostisacostwhichisincurredforaparticularperiodoftimeandwhich,withincertainactivitylevels,isunaffectedbychangesinthelevelofactivity.
4.2Variablecosts(Linear)
Avariablecostvarieswiththelevelofactivityinalinearway.
4.3Semi-fixedorsemi-variablecosts
Part-fixedandpart-variable
[F2_2006_dec_ppq_45]Asemi-variablecostisonethat,intheshortterm,remainsthesameoveragivenrangeofactivitybutbeyondthatincreasesandthenremainsconstantatthehigherlevelofactivity.
IsthisstatementTRUEorFALSE?
(1mark)
[Answer]False
[Explanation]Thisisasteppedfixedcost.
5.Productionandnon-productioncosts(Periodcost)
Productioncostsareincurredinthecourseofthemanufactureofgoods.Theyincludedirectcostsandmanufacturingoverhead.
Non-productioncostsaretakendirectlytotheprofitandlossaccountasexpensesintheperiodinwhichtheyareincurred;suchcostsconsistofsellingandadministrativeexpenses.
Productionandnon-productioncostshavedifferentinfluencesontheprofitdecisionandinventoryvalue.
Exercise:
Whichofthefollowingbestdescribeaperiodcost?
a)Acostthatrelatestoatimeperiodwhichisdeductedasexpensesfortheperiod
b)Acostthatcanbeeasilyallocatedtoaparticularperiod,withouttheneedforarbitraryapportionmentbetweenperiods
c)Acostthatisidentifiedwithaunitproducedduringtheperiodwhenthestockisactuallysold
d)Acostthatisincurredregularlyeveryperiod,egeverymonthorquarter
[Answer]A
6.Othercostclassifications
a)Avoidablecostsandunavoidablecosts
b)Controllablecostsanduncontrollablecosts
c)Discretionarycostsandcommittedcosts
Exercise:
Whichofthefollowingbestdescribesacontrollablecost?
A.Acostwhicharisesfromadecisionalreadytaken,whichcannot,intheshortrun,bechanged.
B.Acostforwhichthebehaviourpatterncanbeeasilyanalysedtofacilitatevalidbudgetarycontrolcomparisions
C.Acostwhichcanbeinfluencedbyitsbudgetholder
D.Aspecificcostofanactivityorbusinesswhichbeavoidediftheactivityorbusinessdidnotexist.
[Answer]C
7.Costunits,costobjectsandresponsibilitycenters
7.1Costobjects
Costobjectsisanyactivityforwhichaseparatemeasurementofcostsisdesired.
Bothcostunitandcostcenterarecostobjects.
7.2Costunits
Acostunitisaunitofproductorserviceinrelationtowhichcostsareascertained,ie.Itisthecostoftheoutputorproductofthebusiness.
Theascertainmentofthecostpercostunitisimportantfor:
a)Pricingdecisions
b)Measuringchangesincostsastheactivitylevelchanges
c)Stockvaluation
d)Planningfuturecosts
e)Controllingcosts,ie.Comparingactualtobudgeted
[1-2_pilotpaperSectionA_13]Whatwouldbethemostappropriatecostunitforacakemanufacturer?
Costper:
A.Cake
B.Batch
C.Kg
D.Productionrun
[Answer]B
[Explanation]Itwouldbebetterifthecostsforabatchofcakeswereusedascostspercakemaybetoosmall,costsperkgmaynotresultinthesamenumberofcakesandcostsperproductionrunmayalsogivevaryingbatchsizes.
Exercise:
Whichofthefollowingitemsmightbesuitablecostunitwithinthecreditcontroldepartmentofacompany?
i.Stationerycost
ii.Customeraccount
iii.Chequereceivedandprocessed
7.3Responsibilitycenters
7.3.1Costcenters
Costcentersarecollectingplacesforc
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