ACCA《F4公司法与商法》精选讲义第一章(3)

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Session 3 Types of cost and cost behavior

Main contents:

1. Classifying costs

2. Cost objects, cost and cost centers

3. Analysis of costs into fixed and variable elements

3.1 Classifying costs

Costs can be classified in a number of different ways:

· Element – costs are classified as materials, labor or expenses （overheads）

· Nature – costs are classified as being direct or indirect.

a. Direct cost is expenditure that can be directly identified with a specific cost unit or cost center.

（1）。Direct material is all material becoming part of the product unless used in negligible amount and/or having negligible cost. （component parts, part finished work and primary packing material）

（2）。Direct wages – are wages paid for labor either as basic hours or as overtime expensed on the product line.

（3）。Direct expense are any expense which are incurred on a specified product other than direct material and direct labor.

b. Indirect costs/ overheads; are expenditure that can not be directly identified with a specific unit or cost center and must be ‘shared out’ on an equitable basis.

· Behavior –costs are classified as being fixed, variable, semi-variable or stepped fixed.

a. Fixed costs: are costs that are not affected in total by the level of activity, but remain the same.

b. Variable costs: are the costs that change in total in direct proportion to the level of activity.

c. Semi-variable/semi-fixed/mixed costs: are costs which contain both fixed and variable components and so it partly affected by changes in the level of activity.

d. Step costs: are fixed in nature but only within certain level of activity.

· Function: costs are classified as being production or non-production costs.

e. Production costs: are costs included in a stock valuation. The product cost is the cost of making or buying.

f. Period costs （general cost）：are costs that are not attributed to product costs, but instead are treated as a cost of the time period when they arise.

· Other cost classification:

Avoidable cost: cost which can be eliminated by changing operations

Unavoidable cost: cost which will not be changed by decision making.

Controllable cost: those cost controllable by a particular manager in a given period.

Uncontrollable cost: any cost that can not be affected by management within a given period.

COST MODEL: $

Direct material: 2

Direct labor 3

Direct expense 1Direct cost 6

Production overhead （Note）1

Total production cost 7

Administration Overhead 1

Selling and distribution Overhead 1Total cost 9

Note: Production overhead includes indirect material, indirect labor and indirect expense.

3.2 Analyzing costs:

Cost objects: a cost object is any activity for which a separate measurement of cost is undertaken.

Cost units: a cost unit is a unit of product or service in relation to which costs are ascertained

Responsibility centers: a department whose performance is the direct responsibility of a specific manager.

The main responsibility centers are:

· Cost center – the performance of a cost center manager is judged on the extent to which cost targets have been achieved.

· Revenue center – Within an organization, this is a centre or activity that earns sales revenue. And whose manager is responsible for the revenue earned but not for the costs incurred.

· Profit center – a part of the business whose manager is responsible and accountable for both costs and revenue. The performance of a profit center manager is measured in terms of the profit made by the centre.

· Investment centre – a profit centre with additional responsibility for investment and possibly also for financing, and whose performance is measured by its return on capital employed.

（ROCE）。

Cost equations:

Equation of a straight line

The equation of a straight line is a linear function and is represented by the following equation:

Y = a + bx

Total cost = Total FC + Total VC

Y= a + bx

· Y = total cost

· a = the fixed cost for the given period

· b = the variable cost per unit

· x = the number of units of activity

Cost graphs

Cost and revenue $

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