Can be accurately traced to a product

Are significant in the production process

Are incurred in a specific period

Include only purchase of materials

Depreciation of factory machinery

Shop rent

Sales staff commission

Factory manager’s salary

Materials used in making a hand-bag

Sales staff salaries

Wages of a worker installing solar water-heaters

Overheads assigned to the manufacture of computer components

A predetermined cost based on a preconceived benchmark

Essentially the same as ‘budgeted cost’

Determined by industry standards

All of a), b) and c).

Those not directly attributable to the product

Are treated as an expense in the period in which they are incurred.

Include advertising, office rent and wages of office staff

a), b), and c)

They are too insignificant to justify identifying the cost that relates to a particular product

Include the insurance of the factory and the oil and other lubricants used in maintaining the factory machinery.

Those costs which cannot readily be associated with a product

Include the cost of the wages of a hairdresser providing a haircut.

Fixed costs are those which do not change in response to changes in the level of activity

Some costs may have both fixed and variable elements

Variable costs are those which do change in response to changes in the level of activity,

Variable costs include the rent of the factory or the depreciation of the factory machinery.

Enables analysis of the variance between actual and standard cost

Can only be determined at the end of the period when actual overhead costs are known

Uses costs for labour, materials, and overheads based on predetermined input volumes and prices.

Uses actual costs of labour and materials and actual overheads

Assist mangers to identify variances and problem areas where performance could be improved.

Create documents for the Financial Statements at Financial year end

Identify a producer’s costs and allocate them to cost objects

Allow a business to distinguish the costs of different products

A cheaper supplier of raw material was found

There is an unexpected increase in the price of raw material

There is wastage of raw material by poorly trained or inexperienced workers

The use of higher grade raw material may lead to smaller quantity of raw material

Use of lower qualified, cheap to employ workers

An unexpected wage rise, using high paid workers to do the lower paid jobs

Improved productivity is achieved by better motivated employees

Improved productivity is achieved by efficient equipment