Cost Classification and Cost Centers

Questions and Answers

What is a controllable cost?

A cost that is always abnormal and avoidable

A cost that cannot be influenced by the action of a specified member of an undertaking

A cost that is always normal and unavoidable

A cost that can be influenced by the action of a specified member of an undertaking (correct)

Administrative costs are an example of selling and distribution expenses.

False

What is an example of a normal or unavoidable cost?

Cost of normal spoilage of material and the cost of normal idle time

Packaging costs are considered ______________________ costs where they relate to primary packing.

production Signup and view all the answers

Match the following cost classification types with their definitions:

Controllable Cost = A cost that can be influenced by the action of a specified member of an undertaking Uncontrollable Cost = A cost that cannot be influenced by the action of a specified member of an undertaking Normal Cost = Cost that is typically expected to occur in the normal operation of a business Abnormal Cost = Cost that is not typically expected to occur in the normal operation of a business Signup and view all the answers

What is an example of a functional cost?

Production cost Signup and view all the answers

What is a sunk cost?

A cost that has already been incurred and cannot be changed by a future decision Signup and view all the answers

Historical cost is a type of cost that is estimated before it is incurred.

False Signup and view all the answers

What is the purpose of cost centers?

To allocate costs before further analysis Signup and view all the answers

Cost reduction implies a temporary reduction in the unit cost of goods manufactured or services

False Signup and view all the answers

What is a cost unit?

A unit of product or service to which costs can be related. Signup and view all the answers

A cost object is any activity for which a separate measurement of costs is desired, such as ________________________

the cost of a product Signup and view all the answers

Match the following cost-related terms with their definitions:

Cost Control = Comparative analysis of actual costs with appropriate standards or budgets Cost Reduction = Real and permanent reduction in the unit cost of goods manufactured or services Cost Management = Includes both cost control and cost reduction to increase productivity Signup and view all the answers

What is an example of a cost center?

A department Signup and view all the answers

Cost units are used to allocate costs to cost centers

False Signup and view all the answers

In a hospital, a cost unit would be a ________________________

patient Signup and view all the answers

What is the definition of a cost unit according to CIMA, London?

A unit of product or service in relation to which costs are ascertained Signup and view all the answers

Cost centres are primarily of three types: personal, impersonal, and functional.

False Signup and view all the answers

What is the formula to calculate cost?

Cost = Quantity x Price Signup and view all the answers

A ______________ is a location, person, or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control.

Cost Centre Signup and view all the answers

Match the following cost centres with their descriptions:

Production cost centre = Where actual production work takes place Service cost centre = Render services to production cost centres Signup and view all the answers

What is the term for the amount of expenditure (actual or notional) incurred on, or attributable to, a specified thing or activity?

Cost Signup and view all the answers

Cost and expense are the same thing.

False Signup and view all the answers

Give an example of a cost unit.

A kilowatt-hour of electricity or a meal of a catering shop Signup and view all the answers

Study Notes

Cost Classification and Cost Centers

Cost centers are collecting places for costs before they are further analyzed into cost units.
Examples of cost centers include:
A department
A machine or group of machines
A project

Cost Units

A cost unit is a unit of product or service to which costs can be related.
Examples of cost units include:
A bottle of soft drink
A patient in a hospital

Cost Object

A cost object is any activity for which a separate measurement of costs is desired.
Examples of cost objects include:
The cost of a product
The cost of operating a department
The cost of a service

Cost Control, Cost Reduction, and Cost Management

Cost control involves comparative analysis of actual costs with appropriate standards or budgets to facilitate performance evaluation and formulation of corrective measures.
Cost reduction involves bringing costs down through real and permanent reduction in the unit cost of goods manufactured or services.
Cost management includes both cost control and cost reduction, with the objective of increasing productivity of resources and factors of production to enhance profitability.

Cost Classification

Cost classification based on controllability:
Controllable cost: a cost which can be influenced by the action of a specified member of an undertaking.
Uncontrollable cost: a cost which cannot be influenced by the action of a specified member of an undertaking.
Cost classification based on normality:
Normal or unavoidable costs: costs of normal spoilage of material and normal idle time.
Abnormal or avoidable costs: costs of spoilage of material above the normal limit.
Cost classification based on function:
Production cost: costs incurred in the sequence of operations beginning with the supply of raw materials and ending with the completion of the product.
Administration cost: costs of managing an organization, including salaries of managers and employees, and rent expenses of office building.
Selling and Distribution expenses: costs incurred in selling the products to customers and distributing them.

Cost Classification (continued)

Cost classification based on time:
Historical cost: pre-determined cost.
Cost classification based on relevance to decision making and control:
Marginal cost
Sunk cost
Opportunity cost
Standard cost
Shut down cost
Replacement cost
Abandonment cost

Cost Definition and Cost Unit

A cost is the amount of expenditure (actual or notional) incurred on, or attributable to, a specified thing or activity.
Cost = Quantity x Price
A cost unit is a unit of product or service in relation to which costs are ascertained.

Cost Centre

A cost centre is a location, person, or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control.
Examples of cost centres include:
Personal cost centre: a person or a group of persons.
Impersonal cost centre: a location or an item of equipment or group of these.
Cost centres can be classified into:
Production cost centre: where actual production work takes place.
Service cost centre: which renders services to production cost centres.

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Description

This quiz covers the concepts of cost classification, total cost calculation, and cost centers. Learn about the process of tracing costs to cost centers and how they are further analyzed into cost units.