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Summary TL 104 Learning Unit 13.1-3 NATURE, CLASSIFICATION AND ALLOCATION OF COST

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This document contains an extensive summary of Learning Unit 13 covered in Tutorial Letter 104 which is examinable for Test 3 on 13 June 2023. Topics covered include the nature and classification of cost, variable and absorption costing and activity-based costing (ABC). I used DRURY 10th edition fo...

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MAC4862 – TL 104
PART 4 – COST ACCOUNTING BASES AND ALLOCATION

LEARNING UNIT 13 – NATURE, CLASSIFICATION AND ALLOCATION OF COST

13.1 – Nature and classifica on of cost ……………………………………….2

13.2 – Variable and absorp on cos ng ……………………………………….15

13.3 – Ac vity-based cos ng (ABC) …………………………………………...39

LEARNING UNIT 14 – PRODUCT COSTING SYSTEMS




NOT COVERED IN THIS DOCUMENT. WILL BE SUMMARISED SEPARATELY.
14.1 – Job cos ng

14.2 – Process cos ng

14.3 – Joint and by-product cos ng

PART 5 – PLANNING AND CONTROL

LEARNING UNIT 15 – PLANNING, BUDGETING AND CONTROL

15.1 – Budge ng and management control systems

15.2 – Other cost management techniques/principles

15.3 – Cost-volume-profit analysis

LEARNING UNIT 16 – STANDARD COSTING

16.1 – Variance analysis

16.2 – Reconcilia on of budget to actual

16.3 – Variance analysis for controlling purposes

16.4 – Pro-ra ng of variances and compliance with the relevant accoun ng standard

LEARNING UNIT 17 – PERFORMANCE MEASUREMENT

17.1 – Divisional financial performance measures

17.2 – Transfer pricing in divisional companies

PART 6 – DECISION-MAKING

LEARNING UNIT 18 – INFORMATION APPLICATION TO DECISIONS

18.1 – Relevant costs and revenues for decision-making

18.2 – Pricing decisions and profitability analysis

LEARNING UNIT 19 – INFORMATION FOR DECISION-MAKING

19.1 – Decision-making under condi ons of risk and uncertainty




Page 1 of 55

, MAC4862 – TL 104
PART 4 – COST ACCOUNTING BASES AND ALLOCATION

PART 4 - PURPOSE

• Key cos ng terms and guidelines
• Concepts and established principles

in order to classify, record and present costs for the goods sold and valua on of inventories and
compile Statements of Profit or Loss and Other Comprehensive Income on different bases.




PART 4 CONSISTS OF THE FOLLOWING LEARNING UNITS:

1. Learning Unit 13: Nature, Classifica on and Alloca on Of Cost
2. Learning Unit 14: Product Cos ng Systems



LEARNING UNIT 13 – NATURE, CLASSIFICATION AND ALLOCATION OF COST
A er studying this topic, you should be able to do the following:

13.1. Describe the defini ons relevant to cos ng terms and systems.
13.2. Classify costs and apply cost concepts and cost es ma on techniques in various scenarios.
13.3. Apply variable and absorp on cos ng systems knowledge in a case study scenario.
13.4. Advise on an applicable method when analysing a scenario.
13.5. Apply the total fixed overhead variance calcula on results to a prac cal case study and
correctly account for it in the Statement of Profit or Loss and other Comprehensive Income.
13.6. Apply an ac vity-based cos ng approach to cos ng informa on in a scenario.
13.7. Advise management on which type of cos ng system is appropriate and how the systems
differ.

LEARNING UNIT 13.1 Nature and classifica on of cost

Before studying this topic, you should be able to:

• Define and illustrate a cost.

• Understand the meaning of the important cost defini ons.

• Dis nguish between variable and fixed costs.

• Apply and describe the different methods of es ma ng costs.

• Calculate regression equa ons using the least squares methods and evaluate the goodness of fit
using the coefficient of correla on and coefficient of determina on.

• Apply the high-low method.




Page 2 of 55

, MAC4862 – TL 104
Textbook Reference: Drury Chapter 2 (Pages 22-39)

AN INTRODUCTION TO COST TERMS AND
CONCEPTS
The term cost is frequently used to describe a monetary measure
of the resources sacrificed or forgone to achieve a specific
objective, such as acquiring goods or services.


COST OBJECTS:
A cost object is any activity for which a separate measurement of
costs is desired. In other words, if users of accounting information
want to know the cost of something, this is called a cost object.
Examples: cost of a product, cost of rendering a service, cost of
operating a particular department, etc.
We typically account for costs in two broad stages:
1. By classifying them into certain categories (e.g. direct
labour, direct materials, indirect costs) or by cost behaviour
(fixed and variable costs)
2. We then assign these costs to cost objects.


CATEGORIES:
1. Direct materials: Material costs that can be specifically and
exclusively identified with a particular cost object.
2. Direct labour: Labour costs that can be specifically and
exclusively identified with a particular cost object.
3. Indirect costs: Costs that cannot be identified specifically
and exclusively with a given cost object, also known as
overheads.

Page 3 of 55

, MAC4862 – TL 104
Manufacturing costs Non-manufacturing costs

Direct Admin
materials overheads
Prime
cost


Marketing
Direct labour
overheads


Conversion
cost
Manufacturing
overheads




4. Period cost: Costs that are not included in the inventory
valuation of goods and which are treated as expenses for the
period in which they are incurred.
5. Product cost: Costs that are identified with goods purchased
or produced for resale and which are attached to products
and included in the inventory valuation of goods.


COST BEHAVIOUR:
1. Variable costs: Costs that vary in direct proportion to the
volume of activity; that is doubling the level of activity will
double the total variable cost. Consequently, total variable
costs are linear and unit variable costs are constant.




Page 4 of 55

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