Cost Classification Part

ACCA - MA – BTM
Aim
The aim of this textbook is to develop knowledge and understanding of management
accounting techniques that support management in planning, controlling, and monitoring
performance in a variety of business contexts.
Syllabus
The syllabus starts by introducing the nature, the source and purpose of management
information followed by the statistical techniques used to analyse data. Then the
syllabus addresses cost accounting and the costing techniques used in business which
are essential for any management accountant.
The syllabus then looks at the preparation and use of budgeting and standard costing
and variance analysis as essential tools for planning and controlling business activities.
The syllabus concludes with an introduction to measuring and monitoring the
performance of an organisation.
NOTES BY BEN TOM MATHEWS

ACCA - MA – BTM
ETHICAL PRINCIPLES TO FOLLOWS THROUGH OUT THE ACCA JOURNEY
Use of the Management Accounts
Std costing and

Annual
statutory
Variance analysis
Report Capital
accounts Investment
Appraisal
Budgets
and Forcast
Cashflow
Reports
Returns to
Governament
Profitabiliyt Eg : Sales tax
Report

ACCA - MA – BTM

ACCA - MA – BTM
Cost unit –
• A unit of product or service with which costs are associated
• Cost unit is not always a single item. It might also be calculated in batches.
• Cost unit is linked to the product or service delivered to the customer
COST CENTRES
• An activity or area of responsibility in an organisation that generates costs
• A cost centre only incurs costs, which must be collected and analysed.
• They are not responsible for generating revenue or producing direct profit
COST OBJECT
v A cost object is anything for which costs are collected.
v It can be a product, a service, a project, a department, a customer, or any other entity that
management wants to track the costs associated with.!
COST OF A PRODUCT (a NO OF PATIENTS (for WARD

nail) Hospital)
COST OF SERVICE (hair- A ROOM (for hotel) HOTEL
cut)
COST OF RUNNING A DEPT A LITRE OF PAINT (for pain MACHINE
(pdtn or delivery dept) manu) (how much lits can be
produced in the given time
frame)
COST OF RUNNING A REG A OF STUDENTS / CLASSROOM
OFFICE TEACHERS ( for school)

ACCA - MA – BTM
COST CLASSIFICATIONS
ELEMENTS
NATURE
FUNCTION
BEHAVIOUR

ACCA - MA – BTM

ACCA - MA – BTM
CLASSIFY THE COST as DIRECT OR INDIRECT
Machine operator
Product packaging
Wages for factory supervisor
Rent for factory
Raw materials
Components bought from other suppliers (such as studs to

decorate a sofa)
Electricity used to light a factory
Manager’s salary

ACCA - MA – BTM
Cost Card
A record of the costs associated with producing and selling a single product or service.
COST BEHAVIOUR
Variable
costs
.
Fixed
costs
Semi- Stepped
variable fixed
costs costs

ACCA - MA – BTM
VARIABLE COST
Variable costs are costs that change or vary directly to a change in the
activity level.

ACCA - MA – BTM
FIXED COST
A cost that remains the same irrespective of the output level.

ACCA - MA – BTM
Semi-Variable costs
Semi-variable costs contain both fixed and variable cost elements and are therefore partly affected by fluctuations in
the level of activity.

ACCA - MA – BTM

ACCA - MA – BTM
STEPPED FIXED COST
A stepped-fixed cost is fixed within a range of output (acQvity) and

increases to a higher fixed constant when that range is exceeded.

ACCA - MA – BTM
COST BEHAVIOUR

ACCA - MA – BTM
HIGH LOW METHOD

The high-low method is a technique for identifying the fixed and variable elements of a semi-
variable cost so that more accurate predictions of costs can be made.
Steps:
1. Select the highest and lowest activity levels.
2. Calculate the variable cost per unit.
3. Calculate the fixed cost per unit.
Fixed Cost = Total Cost – (Variable Cost Per Unit x Activity level)
Practice Question

ACCA - MA – BTM
STEP 1: SELECT THE HIGHEST AND LOWEST ACTIVITY LEVEL AND ITS COST
STEP 2: CALCULATE THE VARIABLE COST PER UNIT
STEP 3: CALCULATE THE FIXED COST PER UNIT
1. Select any activity level – here we select the one with 25 units
2. Take the respective TOTAL cost – 750
TOTAL COST = FC + (VC per unit * Activity level)
Fixed Cost = TC – (VC per unit * Activity level)
= 750 – ( 10*25 )
= 500
SO WE KNOW THE TOTAL FIXED COST AND VC PER UNIT
Activity level 58
Total cost = 500 + ( 58*10)
= 500 + 580 = 1080

ACCA - MA – BTM
PRACTICE QUESTION

ACCA - MA – BTM
HIGH-LOW FOR STEPPED FIXED COST

Step 1: Choose 2 activities where the FC remains constant
Step 2: Calculate the VC per unit and T.FC using the normal H-L method
Step 3: Make relevant adjustments to the FC and calculate the total cost as per
the question requirements
• It is given that the FC will increase when the units is above 2000,
which means that for activity level 1000 and 2000 the FC is same
• So find the VC per unit and FC from 1000 and 2000 activity levels using the
normal High low method,
• VC per unit = [14,800 – 9,800] / [2000 – 1000]

• VC per unit = 5000 / 1000 = 5 per unit
• FC = 14,800 – (2000 * 5) = 4,800
• So upto 2000 units of the activity level the FC is 4,800

• Once the production level exceeds 2000 units the FC will have a increase of 20%
• As per the question we have to find the Total cost for 4000 units, which is greater
than 2000 units
• Since there is no change in VC per unit, it is still the same ($5 per unit)
• But the FC must be increased by 20 % [ 4,800 * 120%] = $5,760
Total cost of producing 4000 units = $5,760 + (4000units * $5 per unit) = $25,760

ACCA - MA – BTM

ACCA - MA – BTM

ACCA - MA – BTM

ACCA - MA – BTM

ACCA - MA – BTM

ACCA - MA – BTM

ACCA - MA – BTM

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ACCA - MA – BTM

NOTES BY BEN TOM MATHEWS

ETHICAL PRINCIPLES TO FOLLOWS THROUGH OUT THE ACCA JOURNEY

Use of the Management Accounts

Std costing and

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

COST OF A PRODUCT (a NO OF PATIENTS (for WARD

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

CLASSIFY THE COST as DIRECT OR INDIRECT

Wages for factory supervisor

Rent for factory

Components bought from other suppliers (such as studs to

Electricity used to light a factory

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

STEPPED FIXED COST

A stepped-ﬁxed cost is ﬁxed within a range of output (acQvity) and

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

HIGH ­ LOW METHOD

2. Calculate the variable cost per unit.

3. Calculate the fixed cost per unit.

NOTES BY BEN TOM MATHEWS

STEP 2: CALCULATE THE VARIABLE COST PER UNIT

STEP 3: CALCULATE THE FIXED COST PER UNIT

SO WE KNOW THE TOTAL FIXED COST AND VC PER UNIT

Total cost = 500 + ( 58*10)

= 500 + 580 = 1080

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

HIGH-LOW FOR STEPPED FIXED COST

• VC per unit = [14,800 – 9,800] / [2000 – 1000]

• So upto 2000 units of the activity level the FC is 4,800

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

NOTES BY BEN TOM MATHEWS

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HIGH LOW METHOD