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Extra resources for CIMA - C01 Fundamentals of Management Accounting: Study Text
CIMA Official Terminology Classification can be by nature (subjective), by purpose (objective) or by responsibility. 1 Classification by nature Subjective classification of expenditure indicates the nature of the expenditure. • • • Material Labour Expense Each grouping may be subdivided. 2 Classification by purpose Objective classification of expenditure indicates the purpose of the expenditure, the reason why the expenditure has taken place, which might be for: • • • Inventory valuation and profit measurement Decision making Control We’ll be looking at objective classification in the next few sections.
D is an indirect labour cost. 1 Production overhead Production (or factory) overhead includes all indirect material cost, indirect wages and indirect expenses incurred in the factory from receipt of the order until its completion, including: (a) Indirect materials which cannot be traced in the finished product. Consumable stores, eg material used in negligible amounts (b) Indirect wages, meaning all wages not charged directly to a product. 4 Distribution overhead Distribution overhead is all indirect material costs, wages and expenses incurred in making the packed product ready for despatch and delivering it to the customer, including: • • • Cost of packing cases Wages of packers, drivers and despatch clerks Depreciation and running expenses of delivery vehicles Question Direct and indirect labour costs Classify the following labour costs as either direct or indirect.
The variable cost per unit is the same amount for each unit produced whereas total variable cost increases as volume of output increases. A sketch graph of a variable cost would look like this. 1 Examples of variable costs (a) The cost of raw materials (where there is no discount for bulk purchasing since bulk purchase discounts reduce the unit cost of purchases). (b) Direct labour costs are, for very important reasons which you will study in Chapter 7, usually classed as a variable cost even though basic wages are often fixed.