- Cost Classification & Behaviour Prepared by: Yaeesh Yasseen, - - PowerPoint PPT Presentation

MANAGEMENT ACCOUNTING

• Cost Classification & Behaviour

Prepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small & Lucinda Smidt Reviewed by: Achmad Joseph

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Managerial Accounting - Introduction

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Cost & Management Accounting

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Cost Accounting Management Accounting

Scope Limited to providing cost data & information to management for

• perating decision-making and

appraisal Providing all types of information (financial and non-financial) to management for business decision- making Objective Measure of production/service costs and cost control Assist management by providing and analyzing information Nature System is concerns with both past and present information Concern with future information and use of past information for forecasting Techniques Budgetary and costing methods and techniques Budgetary and costing methods together with analytical analysis (ratio analysis) Application Cost assertions and cost control to maximize profits Planning, controlling and decision- making to maximize profit

Cost Classification – Learning objectives

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 Defining the cost object  Identifying direct and indirect costs  Identifying variable and fixed costs  Separate costs for mixed costs

Cost Object

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Cost Object

Cost object is defined the activity (product/service) for which the cost needs to be determine.

Direct & indirect Costs

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Cost vs Expenses

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Resources sacrifice to achieve the cost object – cost incurred to acquire resource/benefit

Expense:

Cost incurred to conduct the

• perating activities of the

business

Cost vs Expenses - Illustration

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8 Cost Expense Cost of a machine acquired Depreciation charged for the use of the machine Cost of the goods purchased for resale Cost of goods sold when the sale is concluded Cost to insure the business and its assets Insurance charged to income statement for the period Production costs to produce the product – overhead costs Administrative and selling expenses incurred to conduct the business

Types of Costs

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Direct & Indirect Costs

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Direct costs Bricks, cement, tiles to build an apartment Indirect costs Costing of leasinga cement mixing machine or electricity

COST ASSIGNMENT

COST OBJECT Cost tracing Cost allocation

Direct & Indirect Costs

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11 Direct costs Materials used in the manufacture of products (bricks, sand & cement used in construction) Salaries & wages paid to the production staff – actively involved in the manufacturing process (construction employees) Indirect costs Cost accountant who administers all the products undertaken by the business Salaries paid to the project manager who supervisors a number of projects in the construction industry

Cost Behaviours

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Cost Behaviour:

Provides an indication of the sensitivity of costs in relation to changes in the level of activities or output

Importance of Cost Behaviour:

Cost behavior assist management in carrying out their managerial function of cost management and control as well as

• perational decision-making

Cost Behaviours

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Material cost Material costs changes as the number of units produce changes – direct relation between materials used and output Factory rent Rental for the factory will not be affected by the number of units produced – floor space has not relationship to output Salaries paid Salaries is one of the challenging cost behaviours as if is affected by the basis

• f payment – if the basis in not linked to
• utput then it will not change even if

the output changes

Variable Costs

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Price

Volume (Level of Activity)

Total variable costs changesin relation to the level of activity Variable cost per unit remains fixed

Variable Cost - Test

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15 Units 10,000 20,000 30,000 Total cost 40,000 80,000 120,000 Cost/unit 4.00 4.00 4.00 Total cost changes as the number of units changes Cost per unit remains fixed irrespective of the changes in the number of units produced

Fixed Costs

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Total fixed costs remains constant for all levels of activity

Price

Volume (Level of Activity)

Average fixed cost per unit varies as level of activity changes

Fixed Cost - Test

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17 Units 10,000 20,000 30,000 Total cost 90,000 90,000 90,000 Cost/unit 9.00 4.50 3.00 Change in units 100% 50% Change in cost/unit 100% 50% Total cost remains unchanged as the number of units changes Cost per unit changes as the number of units produced changes Rate of change in output is equivalent to the rate

• f change in the average

cost per unit

GROUP WORK – ACTIVITY 1: PERAJ

[Classification between variable & fixed costs]

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Total Cost

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Price

Volume (Level of Activity)

Variable costs Fixed costs Total cost TC = FC + VC y = a + bX Total average cost per unit

Total Cost - Profitability

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20 Units 50,000 100,000 Sales 1,000,000 2,000,000 Variable costs 500,000 1,000,000 Fixed costs 300,000 300,000 Profit 200,000 700,000 Profit per unit 4.00 7.00 Variable cost per unit 10.00 10.00 Fixe cost per unit 6.00 3.00 Increase in profit per unit of R 3.00 is attributed to the decrease in fixed cost per unit

GROUP WORK – ACTIVITY 2: CHAPLEEN

[Impact of costs on decision-making]

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Mixed Cost

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Price

Volume (Level of Activity) Costs are fixed for a certain levelof activity Costs varies beyond the critical point Mixed costs contain botha fixed and variable component

Mixed Cost

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23 Units 5,000 10,000 20,000 Total cost 20,000 30,000 50,000 Average cost per unit 4.00 3.00 2.50 Based on the average cost per unit, the cost is not a variable cost as the average cost per unit changes in relation to the level of output – variable cost is fixed per unit Change in output 100% 100% Change in average cost 33% 20% Based on the change in the output and change in average cost per unit, the cost is not a fixed costs as there is not a direct relationship between the change in output and change in cost – changes in fixed cost represent an inverse proportionate change in output and cost

Mixed Costs - Separation

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Management techniques High-low method: Applies the principleof differential analysis Best-fit method: Applies statisticaland regression analysis

High-Low Method Average cost per unit based on the variances of the output and costs represent the variable cost

Mixed Costs – High-Low Method

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25 Selecting information for the higher & lowest periods Determine the difference between the outputs and costs Calculating the average per unit based on the differences Highest Lowest Difference Output 60,000 80,000 20,000 Total cost 580,000 640,000 60,000 Average cost per unit 3.00 Total variable cost 180,000 240,000 Total fixed cost 400,000 400,000 Total cost 580,000 640,000

GROUP WORK – ACTIVITY 3: SERVICE CENTRE

[Separate of mixed-costs – High-Low method]

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