AAT Level 2 Principles of Costing cheat sheet

Prime cost = direct materials + direct labour + direct expenses.

Production cost = prime cost + production overheads. Total cost = production cost + non-production overheads (administration, selling, distribution).

A direct cost is traceable in full to a cost unit or cost centre; an indirect cost (overhead) is not traceable and must be apportioned or absorbed.

Classification by nature: materials, labour, expenses. Classification by behaviour: fixed (constant in total), variable (constant per unit), semi-variable (fixed plus variable element), stepped fixed.

A cost centre is a location, function, activity or item of equipment for which costs are accumulated; a cost unit is the unit of product or service to which those costs are charged.

Cost centre types: production centres make the product directly; service centres support production (stores, maintenance, canteen). A profit centre records revenue as well as cost.

Sources of direct material cost: purchase invoices, goods received notes, materials requisition notes, stores ledger. Sources of labour cost: clock cards, timesheets/job cards, payroll records.

A coding system gives each cost an expense (nature) code, a cost centre code and, where relevant, a cost unit code, so costs are classified and analysed consistently.

Other classification pairs used in cost recording: controllable/uncontrollable, avoidable/unavoidable, relevant/irrelevant, sunk cost, opportunity cost.

Job costing collects costs separately for each identifiable job or order; batch costing treats a group of identical units as one cost unit, so unit cost = total batch cost / units in the batch.

Process costing applies to continuous production of identical units; average cost per unit = total process cost / units produced (or expected output after allowing for normal loss).

Marginal costing charges variable costs only to the cost unit: contribution = sales revenue - variable costs; profit = total contribution - fixed costs.

Absorption (full) costing adds a share of fixed production overhead to the unit cost, so inventory is valued at full production cost.

Allocation charges a whole cost to a single cost centre where it is wholly attributable; apportionment splits a shared cost between centres on a fair basis (floor area, machine hours, employee numbers, asset values).

Overhead absorption rate = budgeted production overhead / budgeted activity level, expressed per direct labour hour, machine hour or unit.

Service centre costs are reapportioned to production centres before the absorption rate is calculated; only production centre overheads are absorbed into cost units.

Contract costing applies job costing to long-term, site-based contracts and uses work certified, retention and progress payments to measure cost and value.

Service costing uses a composite cost unit such as cost per passenger-mile, cost per patient-day or cost per tonne collected.

Material cost = purchase price less trade discount + carriage inwards + handling costs. Recoverable VAT is excluded; trade discount is deducted before VAT; a cash (settlement) discount is not deducted from cost.

Reorder level = maximum usage x maximum lead time. Minimum (buffer) stock = reorder level - (average usage x average lead time).

Free stock = stock in hand + stock on order - stock already allocated to customers; free stock is the figure tested against the reorder level.

Stock valuation methods: FIFO (oldest prices issued first), LIFO (most recent prices issued first) and AVCO/weighted average (average recalculated after each receipt). Closing stock is valued at the lower of cost and net realisable value.

Gross pay = basic pay + overtime + bonuses + allowances. Net pay = gross pay - PAYE - employee NIC - pension - other deductions.

Overtime premium is an indirect (overhead) cost unless the overtime was worked at a specific customer's request, in which case it is a direct cost of that job.

Idle time is paid but unproductive time and is treated as an indirect labour cost charged to production overhead; only productive time on a job is direct labour.

Accrued expense is incurred but not yet invoiced, so it is added to the period's cost; prepaid expense is paid in advance for a future period, so it is excluded from the current period's cost.

Other expenses are charged to cost centres by direct allocation where identifiable, otherwise by apportionment on a suitable basis such as insurance on floor area.

Total cost = prime cost + production overhead + non-production overhead (administration, selling, distribution).

Cost per unit = total recorded cost / number of units produced or service units provided; unit cost allows comparison between periods and with budget.

Over-absorption = overhead absorbed - actual overhead (positive means over-absorbed, a credit). Under-absorption = actual overhead - overhead absorbed (positive means under-absorbed, a debit).

Non-production overheads are period costs written off in the period incurred and are excluded from inventory valuation.

Variance = actual - budget. For a cost, actual above budget is adverse and actual below budget is favourable; for revenue the position is reversed.

A cost report normally shows: title and organisation, period covered, preparer, costs classified by cost centre or cost unit, totals and unit costs, budget comparison, and commentary on significant variances.

Present cost data consistently: same rounding, same units, same layout each period, totals cross-cast, and unit costs shown to a stated number of decimal places.

The cost ledger control account holds the total of all cost ledger balances; agreement with the financial ledger checks the arithmetical accuracy of the cost records.

Recorded costs are reconciled to source documents (requisitions, timesheets, invoices) before reporting; differences are investigated and explained, not simply written off.