Cost Classification: Acca - Applied Knowledge

ACCA – APPLIED KNOWLEDGE
BISC TRAINING CENTER

Ms. Nguyen Bich Ngoc, ACCA
www.bisc.edu.vn
085 8822 168
training@bisc.edu.vn
Part A
THE NATURE, SOURCE AND PURPOSE
OF MANAGEMENT INFORMATION
Chapter 3
Cost
classification
Hockiemtoanonline.edu.vn 2
1
Chapter 3 – Main parts
Part 1. Cost classification
Part 2. Cost code
Cost classification
THE CLASSIFICATION
OF COST
Types of Direct or
Function Behavior
expense Indirect
2
Cost classification
FUNCTION
Production costs
Finance costs
Administration
Add Your Text
costs
Function
Selling costs
Distribution costs
Research costs
Cost classification
TYPES OF EXPENSE
Materials
Labour Types of expense
Expenses
3
Cost classification
DIRECT/INDIRECT
TOTAL COST
Production
Direct (Prime)
Indirect
Cost
(Overhead) Cost
Direct Direct Direct Indirect Indirect Indirect

Material Labour Expense Material Labour Expense
Cost classification
DIRECT/INDIRECT
Direct Cost (Prime Cost)
Cost that can be traced in full to the product, services or department that
is being costed
• material becoming part of the product, charge as prime cost:

Direct material component parts, part-finished work, and primary packing
materials
• Direct wages are all wages paid for labour, charge as prime
Direct labour cost (take into account overtime premium of direct labour
force)
• are any expenses which are incurred on specific product other

than direct material and direct cost
Direct expenses • charged to the product as part of prime cost (cost of special
designs, drawing of layouts, hire of tools or equipment).
4
Cost classification
DIRECT/INDIRECT
Indirect costs/Overhead is a cost that is incurred in the course of making

a product, producing a service or running a department but which
cannot be traced directly in full to the product/ service/ department
 Production Overhead
• Indirect Materials: e.g. Consumable stores, abnormal losses
• Indirect Wages: non-productive personnel, i.e. foremen
• Indirect Expenses: e.g. rents, rates, depreciation, utility
 Administration Overhead
 Selling & Distribution Overhead
Cost classification
BEHAVIOR
Cost behaviour is the
way in which costs are
Fixed cost affected by changes in
volume of output
Variable cost
Semi- Variable cost
Stepped- fixed cost
5
Cost classification
BEHAVIOR
Variable cost: cost are changed in direct proportion to the
level of activity such as direct material, direct labour
• Variable cost in total: • Variable cost per unit

changes at the same rate
as the level of activity
Cost classification
BEHAVIOR
Fixed Costs: Costs are not affected in total by the level of activity
• Fixed cost in total • Fixed cost per unit
6
Cost classification
BEHAVIOR
• Semi-variable cost • Stepped cost
Cost classification
HIGH-LOW METHOD
• Purpose: identify the fixed and variable elements of a mixed cost

• Assumption: costs are linear
Total cost = Fixed Cost + (Variable cost/ Unit * Total Units)
• Method: Take the highest and lowest activity volume

• Calculate variable cost VC = (TC1-TC2)/(Q1-Q2)
• Calculate fixed cost FC = TC1 – VC * Q1
TC1 = FC + VC * Q1
TC 2 = FC + VC * Q2
7
Cost classification
1. A particular cost is fixed in total for a period.
What is the effect on the cost per unit of a reduction in
activity of 50%?
A. Cost per unit increases by 50%
B. Cost per unit reduces by 50%
C. Cost per unit increases by 100%
D. Cost per unit is unchanged.
Cost classification
2. Total production costs and output over three periods
have been:
Period Production costs Output
1 £230,485 12,610 units
2 £254,554 14,870 units
3 £248,755 14,350 units
What are the estimated variable production costs per unit if
the high–low method is applied?
A. 10·50
B. £10·65
C. £11·15
D. £15·50
8
Cost classification
3. The table shows the total of Cost Y at different
production levels of Product X:
Units of Product X Total Cost Y (£000)
50 60
100 60
150 60
200 90
250 90
What could have been the cause of the increase in cost?
A. Increased fuel and maintenance costs for delivery vehicles
B. Increased storage requirements
C. Loss of discounts on raw materials
D. Pay increase for direct labour
Cost classification
Other cost classifications
 Product Cost/Period Cost:

• Product Cost: are cost identified with a finished product.
Such a cost are identified initially as part of the value of
stock and recognized as expenses (in the form of cost of
goods sold) when stock is sold. Example: Cost of Goods sold
• Period costs are costs that are deducted as expenses during
the current period without ever being included in the value
of stock held. Example: Interest/ advertising, etc
 Avoidable cost/ Non-avoidable cost: Cost can be avoided if
certain activity does not happen and vice versa.
 Controllable/Uncontrollable cost: Cost can be controlled and
vice versa
9
Cost code
• Once costs have been classified, a coding system can be

applied to make it easier to manage the cost data, both in
manual systems and in computerized systems
• A code is a system of symbols designed to be applied to a
classified set of items to give a brief, accurate reference,
facilitating entry, collection and analysis.
Cost code
Features:
• The code must be easy to use and communicate
• Each item should have a unique code
• The coding system must allow for expansion
• The code flexible
• Brief
• Uniform
• Minimise errors, avoid confusion
10
Cost code
Types of code
 Sequential (progressive) codes: Numbers are given to items in

ordinary numerical sequence, so that there is no obvious
connection between an item and its code. For example:
• 00042: 4cm nail
• 00043: office stapler
• 00044: hand wrench
 Block (group classification) codes: These are an improvement
on simple sequences codes, in that a digit (often the first one)
indicates the classification on an item. For example:
• 4NNNN: nails
• 5NNNN: screws
• 6NNNN: bolts
Cost code
Types of code
 Mnemonic codes: the code mean something, it may be an

abbreviation of the object being coded. A well-known example
of this type of code is the three letter coding used for airports
• LAX: Los Angeles
• SIN: Singapore
 Hierarchical codes: each digit represents a classification, and a
digit further to the right represents a smaller subset than those
to the left. For example:
• 3: Screws
• 31: Flat headed screws
• 32: Round headed screws
• 322: Steel round headed screws
11
Cost code
Types of code
 Faceted codes: these are a refinement of group classification codes, in that each digit
of the code gives information about an item. For example:
The first digit: 1 Nails
2 Screws
3 Bolts
The second digit: 1 Steel
2 Brass
3 Copper
The third digit: 150mm
260mm
375mm
 Hierarchical codes: these incorporate some digit(s) which is (are) part of the
description of the item being coded. For example:
5000: screws
5050: 50 mm screws
5060: 60 mm screws
Q&A
12

Cost Classification: Acca - Applied Knowledge

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Classification: Acca - Applied Knowledge

Uploaded by

Copyright:

Available Formats

ACCA – APPLIED KNOWLEDGE

BISC TRAINING CENTER

Part 1. Cost classification

Part 2. Cost code

Labour Types of expense

Direct Direct Direct Indirect Indirect Indirect

• material becoming part of the product, charge as prime cost:

• are any expenses which are incurred on specific product other

Indirect costs/Overhead is a cost that is incurred in the course of making

Semi- Variable cost

Stepped- fixed cost

• Variable cost in total: • Variable cost per unit

• Fixed cost in total • Fixed cost per unit

• Semi-variable cost • Stepped cost

• Purpose: identify the fixed and variable elements of a mixed cost

• Method: Take the highest and lowest activity volume

 Product Cost/Period Cost:

• Once costs have been classified, a coding system can be

 Sequential (progressive) codes: Numbers are given to items in

 Mnemonic codes: the code mean something, it may be an

You might also like