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Cost Classification Chapter 2

The document discusses cost classification including production and non-production costs. It defines different cost elements like material, labor, and overhead costs. It also explains concepts like cost objects, cost units, and cost centers. Various cost classification methods and coding systems are described.

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Gulush Mammadhasanova
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
13 views

Cost Classification Chapter 2

The document discusses cost classification including production and non-production costs. It defines different cost elements like material, labor, and overhead costs. It also explains concepts like cost objects, cost units, and cost centers. Various cost classification methods and coding systems are described.

Uploaded by

Gulush Mammadhasanova
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Cost classification

MANAGEMENT ACCOUNTING
Learning objectives
Explain and illustrate production and non-production costs

Describe the difference elements of non-production cost – administrative, selling, distribution and finance

Describe the difference elements of production costs – material, labor and overhead
Explain the importance of the distinction between production and non-production costs when valuing
output and inventories
Classification of costs

Graphically illustration of different type of the costs

Explain advantages and disadvantages of using high low method

Explain the structure of the linear functions and equations

Explain and illustrate the concepts of cost objects, cost units and cost centers

Explain and illustrate the use of codes in categorizing transaction


Analyzing cost
Cost objects: Cost units: Cost centres: cost card:

cost of a product a room (in a hotel) a department direct materials


cost of a service a litre of paint a machine direct labour
cost of running a (paint a project direct expenses
department manufacturers)
a ward (in a prime cost (total
cost of running a in-patient (in a hospital) direct costs)
regional office. hospital)
variable production
overheads
fixed production
overheads
non-production
overheads.
Element Nature Function Behavior
Material Direct Production Variable
Labor Indirect Non-Production Fixed
Expenses Stepped
Fixed
Semi
variable

Classification costs
Test yourself
Test yourself
Test yourself
Test yourself
Answer
Types of Cost Behavior Patterns
Examples of stepped
fixed costs:
– warehousing costs (as
more space is required,
more warehouses must
be purchased or rented)

– supervisors’ wages
(as the # of employees
increases, more
supervisors are equired).
The high low method
The total cost of a semi-variable cost is:

Total costs = Total fixed costs + (Variable cost per


unit × Activity level)
To be able to predict costs at different activity levels it is
necessary to separate the fixed cost element from the
variable cost element. The high low method can be used
to approximate the variable cost per unit and the total
fixed cost.
Step 1 Step 2 Step 3 cost card:

Select the highest Calculate the Calculate the fixed Use the total fixed
and lowest activity variable cost (VC) cost by cost and the
levels, and their per unit: substitution, using variable cost per
associated costs. either the high or unit values from
VC per unit = steps 2 and 3
low activity
(Cost at high level to calculate the
of activity – cost level: estimated cost at
at low level of Fixed cost = Total different activity
activity)/ cost at activity levels:
(High level of level – (Variable Total costs = Total
activity – low level cost per unit × fixed costs +
of activity) Activity level) (Variable cost per
unit × Activity level)
Test yourself
Cost codes

Generic or functional codes - Once


a cost has been allocated its correct
Specific codes - may be necessary
cost center code then it may also be
for cost allocation, decision making
useful to know the particular type of
or accounting purposes to allocate a
expense involved. Therefore, some
code which specifically identifies the
more digits might be added to the
item of cost.
cost center code to represent the
precise type of cost.
Sequential code - means that each code follows a numerical or
alphabetical sequence. Planning is needed to determine how many
codes might be needed in total.

Block code - often used to categorise sequential codes together.

Hierarchical code - Each digit in the code represents a classification. As


the code progresses from left to right each digit represents a smaller
subset.

Significant digit code - is a code that contains individual digits and letters
Coding systems that
are used to represent features of the coded item.

Faceted code - one that is broken down into a number of facets or fields,
each of which signifies a unit of information.

Mnemonic code - something that aids the memory or understanding.


This uses an alphabetical coding rather than a numerical coding system.
It is often used to abbreviate or simplify information.
Quiz
Cost Classification | Quizizz

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