COST TERMS & CONCEPTS

Required reading: Gowthorpe, Chapter 11 p.213-218

5BA Business Accounting for Non-Specialists

Management Accounting… a reminder

(Source: Catherine Gowthorpe, Business Accounting & Finance for Non-Specialists, 3nd Edition, Cengage Learning.)
 Weeks 7 – 10
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 Week 8
Introduction to Cost Terms and Concepts/Cost Behaviour (L1)
Cost Terms and Concepts/Cost Behaviour (L2)
 Week 9
Costing for Decision Making (L1)
Costing for Decision Making (L1/L2)
Tutorial - Cost Terms and Concepts
 Week 10
Pricing (L1)
Pricing (L2)
Tutorial - CVP Analysis / Pricing
 Week 11
Budgeting (L1)
Budgeting Examples (L2)
Tutorial - Budgeting
 Textbook & Reading List
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5BA – Lecture 1
 Final Exam
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 2 hour exam totalling 100 marks

 Section A – must answer both questions
Question 1 – financial accounting (40 marks)
Question 2 – management accounting (40 marks)
 Section B – answer only ONE question
There will be two questions of 20 marks each.
You answer only one.
Narrative style questions
 Costs……..
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 Has multiple meanings and different types of costs are used in

different situations
 Most commonly used costs are:
- Direct and Indirect costs
- Fixed and Variable costs
- Period and Product costs
- Cost Behaviour
- Relevant and Irrelevant costs
- Avoidable and Unavoidable costs
- Sunk costs
- Opportunity costs
- Incremental and Marginal costs
 Value Chain
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 Activities that add value to products and services

and cost money…..

(Braun & Tietz, 2014)

 Example
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Suppose Radio Equipment PLC incurs the following costs in its Dundee Store:

Newspaper advertisements £ 5,100

Payment to consultant for advice on location of new store £ 2,900
Purchases of merchandise £38,000
Carriage-in £3,100
Salespeople’s salaries £4,800
Depreciation expense on delivery trucks £1,000
Research on whether store should sell satellite radio service£ 300
Customer complaint department £ 500
Rearranging store layout £ 850
Category of cost in the value chain
Category of the
Cost incurred value chain
Newspaper advertisements
Payment to consultant for advice on location
of new store
Purchases of merchandise
Carriage-in
Salespeople’s salaries
Depreciation expense on delivery trucks
Research on whether store should sell
satellite radio service
Customer Complaint Department
Rearranging store layout

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 Cost Object
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 any activity for which a separate measurement of costs

is required

 examples:
- cost of a product
- cost of a service
- cost of operating a department (function)
 Cost Collection System
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 Stage 1
cost accumulation by cost classification
a. expense type
eg. materials, labour, overheads
or
b. cost behaviour
eg. fixed, variable
 Stage 2 – assign costs to cost objects
 Direct Costs
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 can be specifically identified with a particular cost

object
- Direct Materials

- Direct Labour

- Direct Expenses
 Indirect Costs
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 cannot be specifically identified with a particular cost

object
- Indirect Labour Costs
- Indirect Material Costs
- Overheads

 estimate of resources consumed using Cost Allocations

 Direct and indirect costs

Indirect cost Direct cost

Cost of plant and equipment

depreciation, property taxes and
utilities

https://openclipart.org/detail/183662/carred;
https://cliparts.zone/car-factory-cliparts
 Example: Greetings Card Company
(Source: Catherine Gowthorpe, Accounting & Finance for Non-Specialists, 2 nd Edition)
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 Producing a greetings card:

- A design is produced.
- The design is printed onto card in a run of an
appropriate size – say 1000 cards per production run.
- The card is cut and folded.
- Other processes such as embossing, gilding and over-printing
may be required, depending upon the design.
- The cards are matched with envelopes of suitable size.
- Each card and envelope is individually packaged in a
cellophane wrapper.

 What are the direct and indirect costs involved in this process
assuming that the cost object is the greeting cards?
 Example – Direct Costs
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 Example – Indirect Costs
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 Total Cost
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(Source: Catherine Gowthorpe, Business Accounting & Finance for Non-Specialists, 3 nd Edition, Cengage Learning.)
 Period and Product Costs
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 for profit measurement and stock valuation

 Product Cost
identified with goods purchased / produced for sale
(include direct & indirect production costs)
 Period Cost
not included in the inventory valuation and are
treated as expenses in the period in which they are
incurred
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Drury, 2015
 Example – Period & Product Cost
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Which of the following costs would be considered a

period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
 Conclusion
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By the end of this lecture, homework and tutorial

questions you should be able to:
 explain the difference between direct costs and indirect

costs
 classify costs into direct and indirect costs

 explain the difference between product costs and period

costs