ACC2022H First Semester Outline Notes
Module 1: Costs and Cost Behaviour
Costs
• A cost objects is an activity for which a separate measurement of costs is desired.
• Classifying costs by behaviour
o Direct and indirect
▪ Traceability: there is a direct link between the product being made and the cost being incurred
• Obvious/ easy to see costs are classified as direct
• Indirect costs are not as easily seen on final product (i.e. electricity)
o Controllable and uncontrollable
▪ These costs are used to review the performance of management.
▪ Costs that are controllable and in the scope of managements responsibility, could point to
whether or not management is doing a good job at containing costs
o Fixed and variable
• Value chain
o This chain shows the different phases of a business, namely the: upstream costs (non-manufacturing
9e research and development), the primary process (manufacturing), and the downstream costs (non-
manufacturing i.e., marketing and distribution)
• Manufacturing costs
o Costs incurred in the direct production of a product
o Includes direct materials, direct labour, and manufacturing overheads (indirect costs).
• Non-manufacturing costs
o Costs not in the manufacturing process such as selling and administration costs.
• Product v period costs
o Product costs are assigned to the goods manufactured and are part of inventory (these costs are
capitalized) (See IAS2:10 for what can be included in inventory)
o Period costs are not capitalized and are expensed immediately/ in the period they are incurred (recall
inventory is only expensed through cost of sales when it is sold)
Cost Behaviour
• Cost behaviour refers to the response of costs to a change in the level of activity
• Fixed costs do no change if activity level changes.
, • Variable costs, Step fixed costs, semi-variable, and curve linear costs change with the activity level
• Mixed costs: partly fixed and partly variable. Identify it by finding the cost per unit for two different
point – if they are different, it is a mixed cost
o Use the high low method to find the variable portion, then find the fixed portion
• High low method can be used to predict costs if we know the expected activity level
o We know the fixed portion, then we calculate the VCi per unit x the activity level. Add the two to
get to the total cost.
Module 1: Costs and Cost Behaviour
Costs
• A cost objects is an activity for which a separate measurement of costs is desired.
• Classifying costs by behaviour
o Direct and indirect
▪ Traceability: there is a direct link between the product being made and the cost being incurred
• Obvious/ easy to see costs are classified as direct
• Indirect costs are not as easily seen on final product (i.e. electricity)
o Controllable and uncontrollable
▪ These costs are used to review the performance of management.
▪ Costs that are controllable and in the scope of managements responsibility, could point to
whether or not management is doing a good job at containing costs
o Fixed and variable
• Value chain
o This chain shows the different phases of a business, namely the: upstream costs (non-manufacturing
9e research and development), the primary process (manufacturing), and the downstream costs (non-
manufacturing i.e., marketing and distribution)
• Manufacturing costs
o Costs incurred in the direct production of a product
o Includes direct materials, direct labour, and manufacturing overheads (indirect costs).
• Non-manufacturing costs
o Costs not in the manufacturing process such as selling and administration costs.
• Product v period costs
o Product costs are assigned to the goods manufactured and are part of inventory (these costs are
capitalized) (See IAS2:10 for what can be included in inventory)
o Period costs are not capitalized and are expensed immediately/ in the period they are incurred (recall
inventory is only expensed through cost of sales when it is sold)
Cost Behaviour
• Cost behaviour refers to the response of costs to a change in the level of activity
• Fixed costs do no change if activity level changes.
, • Variable costs, Step fixed costs, semi-variable, and curve linear costs change with the activity level
• Mixed costs: partly fixed and partly variable. Identify it by finding the cost per unit for two different
point – if they are different, it is a mixed cost
o Use the high low method to find the variable portion, then find the fixed portion
• High low method can be used to predict costs if we know the expected activity level
o We know the fixed portion, then we calculate the VCi per unit x the activity level. Add the two to
get to the total cost.
