Moore Accounting Notes

Transcription

1 Moore Accounting Notes These notes were prepared specifically for my accounting students as a part of my teaching and preparation for the CXC CAPE [A level] Examinations in Accounting. RM ACCOUNTS ED

2 COST & COST CLASSIFICATION CAPE ACCOUNTING UNIT 2 obj 6 & 7 RM ACCOUNTS ED ram2014 rights

3 cost What do people mean when they say What is the cost? Do they mean how much did it cost (us) to make the product? - Or Do they mean how much would it cost (them) to get or own the product?

4 Definition Cost refers to the resources (measured in dollars and cents) given to attain a product or service. Or, in other words, cost is a monetary measure of the resources used to make or provide a product/service. It should then be clear that cost will behave differently [generally based on the objective of the information being sought]. Therefore, a cost can be classified in one way at a given point in time; and another way at another point in time.

5 Cost depends on the event s time of occurrence: it can be historical (based on a past event) it can budgeted (based on a future event) e.g I paid $15 for my haircut last week eg the barber plans to charge $20 for a hair cut from next week. or

6 Cost according to its reaction to changes in activity: It can be variable It can be mixed (i.e increases when we increase output and vice versa as there is a direct relationship). (i.e a change in activity will have a direct effect at one point and no effect at another. To make more chairs we must get cut down more trees! It can be fixed I may have to pay more for water.if I used more than the standard allowed. (i.e it remains constant when we increase or decrease output) there is an indirect relationship. To sleep longer.does not require me to pay more for my bed!

7 Cost based on its impact on decisions to be made: The cost is relevant ( if it causes a change in the entity s cash flow). If I have to pay another $20 to drive my car to Halifax.. then that releases my cash and that is relevant. The cost is irrelevant ( if it does not cause a change in the entity s cash flow). If I had already put $20 in fuel in my car.then I would not have to spend it again If I decide to go to Halifax.

8 Cost based on the disclosure of data on financial statements: cost can be expired cost can be unexpired (i.e expenses already used up) If a debt (such as electricity) has already been paid by the entity (i.e expenses paid for but yet to used up) If an expense had been paid for in advance of its occurrence (eg prepaid rent).

9 Cost classification Classification is the process of arranging costs into groups dependent on the purpose (of the cost). The general classifications used in accounting are Inventory valuation & Income determination Decision-making Planning & Control

10 Cost classification: inventory valuation Product costs these are traceable directly to the product or service. They are based on the activities of making or providing the product/service. They are variable costs since they have a positive correlation with changes in production. They are manufacturing costs as they occur during production They are inventoriable costs as they can be transferred from one stage to another. Eg raw materials, direct labour, production overheads. Period costs - these are traceable to the operation of the business itself (not the product) They are based on the activities of selling, distribution or administration. They are fixed costs since they remain relatively constant even when change is made in production. They are non-manufacturing costs as they are not involved in production They are non-inventoriable costs as they cannot be transferred from one time period to another. Eg insurance, rent, manager s salary

11 1.Cost classification: decision-making Cost is avoidable (or relevant) - when there is an opportunity cost/benefit involved [as it would cause a change in the entity s cash flow] Cost is unavoidable (or irrelevant) when there is NO opportunity cost/benefit involved [ as it would not cause a change in the entity s cash flow ] Situations where decisions on cost are required: What does it cost to MAKE rather than to BUY a product? What is the cost of dropping an OLD product or creating a NEW product? What is the cost of CLOSING DOWN as oppose to REMAINING OPEN?

12 Cost classification: planning and control Costs are controllable Costs are uncontrollable if management s actions can influence the outcome (cost) if management cannot alter the outcome (cost), in other words, the cost is sunk. Planning involves the need for the business to predict or forecast possible costs or benefits. Control involves trying to find a relationship between planned cost data and actual cost data.

13 GRAPHICAL CONCEPTS OF COSTS A fixed cost curve is a straight line running parallel to the x axis. It implies that as production increases the cost remains the same. The fixed cost per unit decreases as output increases. [this is only true however, with the relevant range].

14 GRAPHICAL CONCEPTS OF COSTS A variable cost is a straight line that rises upward to the right above the x axis. It implies that as production increases so does the cost The variable cost per unit rises marginally as output increases [or there is a positive proportionate change in cost to a change in production].

15 GRAPHICAL CONCEPTS OF COSTS A mixed cost is a straight line that rises upward to the right at a 45 angle from its starting point. It implies that when there is a change in production activity the cost does not change at the same rate of production; nor does it remain fixed The cost per unit rises marginally as output surpasses the standard set. [think of it as a base rate combined with a per unit charge].

16 GRAPHICAL CONCEPTS OF COSTS A step variable cost is a series of lines which jump from one point to another upwards to the right as production changes due to variations in the measurement process. It would look like a series of disconnected steps going upwards. The cost per unit will vary according to the output platform used. [Think of it as a different charge for every set of given units in a given total]. it changes dramatically at certain points because it involves a large expenditure which cannot be spread over an accounting period.

17 GRAPHICAL CONCEPTS OF COSTS A STEP FIXED COST is a line which will change direction upwards in a series of steps (like a stairs) as production changes due static variations in the measurement process. A type of expense that is more or less constant over a low level shift in activity, but which changes incrementally when activity shifts substantially. An example of a step fixed cost that might be incurred by a manufacturing business would be the need to buy new production machinery to step production activity up another level. [Think of it as a set of fixed charges for every different production level].

18 A COST APPLICATION MODEL Limeslow started charging its customers a constant fee of 25 cents per call. It then introduced an unlimited calls plan where clients were charged $60 per month; as well as a plan customers paid $15 for the first 50 calls; $5 for the next 20calls; and finally $3 for the next 50 calls (within that month). After some consideration, the unlimited plan was scrapped and the monthly rental fee was altered to $20 a month accompanied by a low rate of 5 cents per call was introduced. In recent times, Limeslow, has been offering varies data packages of 100, 400 and 750 mgbs for internet use with charges of $ 10, $25, and $37 respectively.