MAC2601 SUMMARY STUDY NOTES 2022

MAC2601 SUMMARY STUDY NOTES 2022. COST OBJECTS, CLASSIFICATION AND BEHAVIOUR Introduction Cost accounting - process and procedures used to obtain record and report cost data. Used with other accounting info by management when planning and controlling activities of the entity. Cost control - comparing the actual results with the expected results, determining the causes of deviations and making management decisions to ensure that planned results are achieved, or to amend the initial plan because of the changed conditions. Costs - total resources used to achieve specified aims Cost objects and classification of costs Cost objects A cost object is a term used primarily in cost accounting to describe something to which costs are assigned. Common examples of cost objects are: product lines, geographic territories, customers, departments or anything else for which management would like to quantify cost. Classification of costs: Costs can be classified in a number of ways—depending on the purpose of the classification. For example, classification of costs for purposes of determining inventory valuations and cost of goods sold for external reports differs from the classification of costs that would be carried out to aid decision-making. It is important to note that the classifications of costs are not mutually exclusive. That is, a particular cost may be classified in many different ways—depending on the purpose of the classification. S - The study-notes marketplace Downloaded by: SurinaRamlall | Distribution of this document is illegal S - The study-notes marketplace Classification of costs according to their nature or origin Cost - monetary measure of resources given up to acquire goods or services that will benefit the enterprise at present or future date. Either:  Manufacturing costs – sum of costs incurred in manufacturing process, direct materials, direct labour and manufacturing overheads  commercial costs :  Marketing costs – including all costs with promotion of product, acquisition of orders, and admin of marketing function and delivery of finished goods. Costs for obtaining orders for and delivery of manufactured products  Administrative costs – relate to executive, organizational and clerical costs of enterprise, but EXCLUDING costs for manufacturing and marketing functions. All costs relating to day-to-day function of entity. Period costs -costs associated with given accounting period rather than given product e.g. marketing and admin costs are incurred to generate income in specific period but not related to sale of given number of units. Also rent paid for shops to market goods are not influenced by the volume of sales. In accounting match costs against income earned during the same period. Deferred costs - unexpired period costs and shown as asset in Balance Sheet (have not received benefit of outlay yet – so cannot be expensed against income for that period). Product costs - associated with products that are manufactured and can be either expired cost or unexpired cost. Unexpired cost - when product has not been sold e.g. cost of finished goods on hand. Unexpired costs are shown as an asset in the Balance Sheet. Expired cost – an expired cost is a cost that has been recognized as an expense. This happens when an entity fully consumes or receives benefit from a cost (sometimes resulting Total operating costs Manufacturing costs Commercial costs Marketing costs Administrative costs S - The study-notes marketplace Downloaded by: SurinaRamlall | Distribution of this document is illegal S - The study-notes marketplace in the generation of revenue). An expired cost may also be construed as the total loss in value of an asset. Cost classification in relation to product Cost of goods in manufacturing entity determine by knowing which are product costs in entity and also having an understanding of the flow of costs through the accounts of entity. Production costs classified as: A) Direct material - primary materials and easily traced to manufacturing of goods or services rendered. Integral part of end product and normally in predetermined measurable quantities proportional to the volume of production usages. Direct material forms cost element on its own. B) Indirect material -secondary material that is not part of the end product and quantity used is not directly related to volume of production and cannot be linked directly to particular product. Not part of cost element and normally under manufacturing overheads. C) Direct labour -cost of all essential labour physically expended on manufacturing the product and traced conveniently to manufacture of goods or services rendered. Indirect labour costs cannot be directly linked to particular cost objective and are classified under manufacturing overheads D) Manufacturing overheads - refers to all other costs expended in manufacturing process, EXCLUDING direct material and direct labour costs, but INCLUDING indirect material and indirect labour costs. E.g. depreciation, insurance costs etc. So basically they occur during course of production, but can be attributed directly to the Period costs Production costs of total products produced Expired (items sold) Unexpired (items unsold) Expired (items sold) Unexpired (items unsold) Charged in period during which product was sold / cost expired Costs in Income Stmt Inventory still on hand / prepaid costs Assets in Balance Sheet S - The study-notes marketplace Downloaded by: SurinaRamlall | Distribution of this document is illegal S - The study-notes marketplace production unit and amount applied to specific unit can only be estimated by determining total of the overheads for the period and allocating all those cost to the units manufactured in that period. Primary cost - total of direct material and direct labour costs Conversion costs -total of direct labour costs and manufacturing overheads (so total cost of converting the raw material to a finished product). Direct costs - cost that can be accurately traced to a particular cost objective even if not only direct materials or labour, but rather something that is directly related to the objective Indirect costs - cost that is not direct so cannot be accurately traced to specific cost objective. Normally part of the common costs relating to more than one cost objective and cannot be traced individually to products or processes. S - The study-notes marketplace Downloaded by: SurinaRamlall | Distribution of this document is illegal S - The study-notes marketplace STUDY UNIT 2 ESTIMATION TECHNIQUES AND LINEAR EQUATION Introduction Mixed costs contain both a fixed and a variable component. In order to determine the two components, managers must separate the mixed cost into the two cost components i.e fixed costs and variable costs. Breaking mixed costs into fixed and variable portions allows managers to use the costs to predict and plan for the future given the insight on that cost behaviour provides. The process of separating mixed costs into fixed and variable components is referred to as cost estimation. This chapter will present four methods used by managers to estimate costs. Cost estimation methods The four methods of cost estimation to be covered in managerial accounting are listed below:  Simple regression analysis  Scatter graphs  High-low method  Linear regression Cost estimation methods are necessary only for costs that are identified as mixed costs. There is no need to apply an estimation method to break a cost into fixed and variable portions if you have already determined it is solely fixed or solely variable. All four methods produce estimates of amounts of fixed and variable costs. The linear equation Estimation techniques or models can be used to project cost at different levels of operation by employing the following linear equation: Y=a +bx S - The study-notes marketplace Downloaded by: SurinaRamlall | Distribution of this document is illegal S - The study-notes marketplace Key formula: cost equation based on linear equation The cost equation y = a +bx represents a straight line, where: y = total cost; the dependent variable a = total fixed costs; the intercept on the y-axis