MA_Chapter2 - ACTG 1P11 MA CHAPTER 2 COST CONCEPTS Cost...

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ACTG 1P11 – MA CHAPTER 2 COST CONCEPTS Cost classifications Four common ways in which costs are classified: Cost classifications by A. behaviour of the cost B. traceability to a department, process or activity C. relevance in decision making D. function of the cost in the organization a) Costs by Behaviour: o Variable costs – increase or decrease as the level of activity increases/decreases E.g. Direct labour is a variable cost that varies with the level of labour hours, which can then be related to the number of units produced If activity increases 10%, cost increases 10% VC per unit remains the same as # of units increase or decrease o Fixed costs – remain constant as the level of activity increases/decreases E.g. Building rent is a fixed cost that doesn’t vary with the level of production Fixed cost per unit = total fixed costs ÷ total # of units FC per unit will decrease as # of units increases and vice- versa o NB: Variable and Fixed distinction only applies over a given range of activity levels. We call this the “relevant range” b) Costs by Traceability to Cost Objects o Direct costs – directly traceable to a cost driver (e.g. Direct labour is labour costs that can be directly traced to cost of each product) o Indirect costs – cannot be directly traced to a product or are not worth tracing (e.g. building insurance cannot be directly related to the cost of each product)
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o Direct/Indirect is in relation to a cost object, which is anything for which cost data is desired
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c) Costs by relevance o Relevant costs are future cots that differ among the alternatives (“Differential Costs”)
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This note was uploaded on 11/04/2011 for the course ACTG 1P11 taught by Professor Nchasse during the Fall '11 term at Brock University, Canada.

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MA_Chapter2 - ACTG 1P11 MA CHAPTER 2 COST CONCEPTS Cost...

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