MAC3761
, COSTING
Learning Unit 1: Cost Classification:
1) Cost classification:
How costs reacts to change in activity level.
i) Cost behaviour:
Variable costs: Costs that vary in relation to the activity level. (e.g., Material costs).
Relevant range: the range which the linear relationship assumption is true.
Fixed costs: Cost that in total is unresponsive to change in activity. (e.g., Rent of a building)
Step costs: Costs only available in fixed allotments. (Fixed steps)
Mixed costs: cost that have both elements variable element and fixed element e.g., Telephone bill.
Can only be accurate:
- within the relevant range
- withing a specified time period
- in relation to a specific cost driver
ii) Assignment:
Cost object: The item to which the cost is to be traced or allocated.
Direct cost: Cost directly linked to the product.
Indirect cost (Overhead cost): Cost indirectly linked to the product.
iii) Relevance:
Relevant costing refers to determining the financial effect of a decision on the organization.
- Future cost
- Differential cost
- Cash flow
Opportunity cost is the best benefit forgone by taking the proposed course of action.
Differential cost is a cost that differs between 2 alternatives.
Sunk cost is a cost that has already been incurred and consequently cannot be altered by, and is therefore not relevant to, the decision.
iv) Function: (IAS 1)
Function refer to classification of costs in the financial statements in accordance with the function of the cost within the organisation.
- Inventoriable costs - Included in inventory
- Non-inventoriable costs - Not included in inventory
Manufacturing costs = costs incurred in the manufacturing process of a product. (Inventoriable costs)
- Direct Material
- Direct Labour
- Manufacturing overheads (Indirect costs)
Direct + Indirect cost = Manufacturing cost DC + IC = MC
Direct cost = Direct Material + Direct Labour DM + DL = DC
Total Direct cost = Prime cost
Conversion cost = Direct Labour + Manufacturing overheads DL + MO = CC
Indirect cost = Indirect material + Indirect Labour
Indirect cost = Overheads
v) Timing: (IAS 2)
Period cost is the cost that is recognized as an expense immediately on being incurred.
Product cost in an absorption costing system is absorbed in inventory and expensed only when the inventory is sold.
, Learning Unit 2: Cost Estimation:
High Low method:
y = mx + c
y = is the total cost
m = gradient
x = cost driver level
c = Fixed cost
Kies cost driver
Kies hoogste en laagste nommers
High cost - Low cost
m=
High activity - Low activity
Met die m bereken vir c
c = y - mx
Least squares regression:
To solve for the gradient or slope:
n(x.y) - (x)(y)
m=
n(x)^2 - x^2
To solve for the intercept:
y - m(x)
c=
n
Learning Unit 3: Budgets, planning and control:
Characteristics:
- It is future-orientated
- It aims to achieve a predetermined goal or objective
- It is expressed in quantifiable terms
Objectives:
- Budgets facilitate the achievement of an organisation's strategic and tactical objectives.
- Budgets compel planning.
- Budgets promote the co-ordination of activities.
- Budgets promote communication in the organisation.
- Budgets promote a framework for control and responsibility accounting.
- Budgets serve as a framework for authorisation of decisions within the organisation.
- Budgets provide a basis for performance evaluation.
- Budgets provide motivation for employees to improve their performance.
Strategic, tactical and operational budgets:
- Strategic budgets will usually be for a long period, perhaps between 3 and 15 years.
- Tactical budgets will usually be for a period between 1 and 3 years as long as 5.
- Operational budgets are prepared for a single financial period, usually a year or less.
Start with sales, variable expenses, Fixed expenses, etc.
Responsibility for the budget:
- The budget committee
- Responsibility for preparing a budget
Determining the principal budgeting factor:
Principal budgeting factor - the factor that restricts output.
- Sales demand
- Availability of raw materials
- Machine capacity
- Availability of cash and sources of funding.
, COSTING
Learning Unit 1: Cost Classification:
1) Cost classification:
How costs reacts to change in activity level.
i) Cost behaviour:
Variable costs: Costs that vary in relation to the activity level. (e.g., Material costs).
Relevant range: the range which the linear relationship assumption is true.
Fixed costs: Cost that in total is unresponsive to change in activity. (e.g., Rent of a building)
Step costs: Costs only available in fixed allotments. (Fixed steps)
Mixed costs: cost that have both elements variable element and fixed element e.g., Telephone bill.
Can only be accurate:
- within the relevant range
- withing a specified time period
- in relation to a specific cost driver
ii) Assignment:
Cost object: The item to which the cost is to be traced or allocated.
Direct cost: Cost directly linked to the product.
Indirect cost (Overhead cost): Cost indirectly linked to the product.
iii) Relevance:
Relevant costing refers to determining the financial effect of a decision on the organization.
- Future cost
- Differential cost
- Cash flow
Opportunity cost is the best benefit forgone by taking the proposed course of action.
Differential cost is a cost that differs between 2 alternatives.
Sunk cost is a cost that has already been incurred and consequently cannot be altered by, and is therefore not relevant to, the decision.
iv) Function: (IAS 1)
Function refer to classification of costs in the financial statements in accordance with the function of the cost within the organisation.
- Inventoriable costs - Included in inventory
- Non-inventoriable costs - Not included in inventory
Manufacturing costs = costs incurred in the manufacturing process of a product. (Inventoriable costs)
- Direct Material
- Direct Labour
- Manufacturing overheads (Indirect costs)
Direct + Indirect cost = Manufacturing cost DC + IC = MC
Direct cost = Direct Material + Direct Labour DM + DL = DC
Total Direct cost = Prime cost
Conversion cost = Direct Labour + Manufacturing overheads DL + MO = CC
Indirect cost = Indirect material + Indirect Labour
Indirect cost = Overheads
v) Timing: (IAS 2)
Period cost is the cost that is recognized as an expense immediately on being incurred.
Product cost in an absorption costing system is absorbed in inventory and expensed only when the inventory is sold.
, Learning Unit 2: Cost Estimation:
High Low method:
y = mx + c
y = is the total cost
m = gradient
x = cost driver level
c = Fixed cost
Kies cost driver
Kies hoogste en laagste nommers
High cost - Low cost
m=
High activity - Low activity
Met die m bereken vir c
c = y - mx
Least squares regression:
To solve for the gradient or slope:
n(x.y) - (x)(y)
m=
n(x)^2 - x^2
To solve for the intercept:
y - m(x)
c=
n
Learning Unit 3: Budgets, planning and control:
Characteristics:
- It is future-orientated
- It aims to achieve a predetermined goal or objective
- It is expressed in quantifiable terms
Objectives:
- Budgets facilitate the achievement of an organisation's strategic and tactical objectives.
- Budgets compel planning.
- Budgets promote the co-ordination of activities.
- Budgets promote communication in the organisation.
- Budgets promote a framework for control and responsibility accounting.
- Budgets serve as a framework for authorisation of decisions within the organisation.
- Budgets provide a basis for performance evaluation.
- Budgets provide motivation for employees to improve their performance.
Strategic, tactical and operational budgets:
- Strategic budgets will usually be for a long period, perhaps between 3 and 15 years.
- Tactical budgets will usually be for a period between 1 and 3 years as long as 5.
- Operational budgets are prepared for a single financial period, usually a year or less.
Start with sales, variable expenses, Fixed expenses, etc.
Responsibility for the budget:
- The budget committee
- Responsibility for preparing a budget
Determining the principal budgeting factor:
Principal budgeting factor - the factor that restricts output.
- Sales demand
- Availability of raw materials
- Machine capacity
- Availability of cash and sources of funding.
