Chapter 4 Cost classification Cost Objects Units and

Chapter 4 Cost classification

Cost Objects, Units and Centres Cost centre Cost object Cost unit

Classifying costs

Cost Card

Element

Nature Direct costs : costs which can be directly identified with a specific unit or cost centre Total of direct costs = Direct Materials + Direct labour + Direct expenses = Prime Cost Indirect costs : costs which can not be directly identified with a specific unit or cost centre Indirect costs = Indirect Materials + Indirect labour + Indirect expenses = Overheads

Function

Cost Behaviour – Variable cost • A cost that varies in total in direct proportion with the level of activity, e. g. Direct material cost. The cost per unit of product is constant.

Cost behaviour – Fixed Costs A cost that, within certain activity levels, is unaffected by changes in the level of activity.

Cost behaviour – Stepped-Fixed Costs Stepped Fixed Costs: A fixed cost which is only fixed within a certain level of activity. Once the upper level is reached, a new level of fixed costs becomes relevant.

Cost behaviour – Semi variable costs A cost with a fixed and a variable element, e. g. telephone charges with fixed line rental and charge per call

Cost behaviour – Hi-low method Step 1 : Select highest and lowest activity levels and their associated costs. Step 2 : Variable cost per unit = Change in cost / Change in level of activity Step 3 : Find the fixed cost by substitution Fixed cost per unit = Total cost – (Variable cost per unit × Number of units)

Cost equations are assumed to have a linear function and therefore the equation of a straight line can be applied: y = a + bx Where: y = total cost a = fixed cost b = variable cost per unit x = activity level

Cost codes • • Generic or functional codes Specific codes Sequential codes Block codes Hierarchical codes Significant digit codes Faceted codes Mnemonic codes