08. Cost Accounting & CVP

Question 1

What is the nature of cost concepts for materials and labour?

Answer 1

Materials: raw materials used for the production and selling of an item
Labour: efforts exerted to produce any good / service; includes physical effort, mental effort use of intellect, etc.

Question 2

What is the nature of the cost concepts of overheads?

Answer 2

• not easily traceable or linked to a cost object or to a single unit of production
• need to be allocated to the total cost of a product using an appropriate allocation base such as direct labour hours or machine hours
• are used for the benefit of multiple products or clients, e.g. factory insurance or glue used in the construction of multiple products
• the estimated manufacturing overheads are then divided by the allocation base

Question 3

Classify cost objects according to their relationship.

Answer 3

Direct Costs: a cost that can be easily linked to a particular cost object, e.g. raw materials, wages of manufacturing employees
Indirect Costs: costs that cannot be easily linked to a cost object and therefore must be allocated, e.g. insurance, supervisor salaries

Question 4

Classify cost objects according to their behaviour.

Answer 4

Fixed Costs: costs that remain the same irrespective of changes in a business’s level of activity, e.g. rent, insurance depreciation
Variable Costs: costs that change in proportion to a business’s level of activity, e.g. raw materials, wages of manufacturing employees
Mixed Costs: costs that contain both fixed and variable elements, e.g. phone bills, utility bills (connection + usage)

Question 5

Classify cost objects according to their treatment.

Answer 5

Product Costs: all costs that can be linked to a product, e.g. direct material & labour, overheads
Period Costs: costs that are not product costs and relate to the current period but do not have future economic benefits, e.g. advertising, financial expenses

Question 6

Classify cost objects according to their time.

Answer 6

Sunk Costs: past costs that have already occurred and therefore cannot be changed; these costs should be excluded when making decisions about future costs
Relevant Costs: future costs that can be linked to a particular investment / proposal

Question 7

What is the nature of Job order costing?

Answer 7

A method that tracks and allocates direct materials, direct labour, and overhead costs to specific, custom jobs or orders.

Question 8

What is the nature of standard costing?

Answer 8

• standard costing is an accounting system that can be combined with job order costing
• when a business uses standard costing it calculates, on a yearly basis or more often if necessary, the most efficient cost of manufacturing each of its products
• these costs are known as standard costs
• the standard costs are recorded in the accounting system and are later compared to the actual manufacturing costs

Question 9

What is the concept of mark up?

Answer 9

A mark-up involves adding a set proportion to the cost of a product to arrive at a selling price.
Determinations / Considerations:
- achievement of target investment return
- what consumers believe to be an appropriate price
- competitor selling prices
- all period costs covered
- if mark-up is too low, business may experience a loss / not maximised profit

Question 10

Explain the relationship between volume of activity, costs and profit

Answer 10

• a way to find out how changes in variable and fixed costs affect a business’ profit
• businesses can use the results of the analysis to see how many units they need to sell to break even (cover all costs) or reach a certain minimum profit margin

Question 11

What are the uses of CVP for decision making?

Answer 11

• identification of the break-even point- minimum number of sales required to neither make a profit nor a loss and can reveal what margin of safety
• management is able to identify how changes in selling prices and/or variable costs per unit, product mix and/or total fixed costs can be made to achieve a target profit
• facilitates the making of special decisions such as make or buy, accept a special order, close-down a product line or department
• where a constraint exists or manufacturing capacity management is able to determine the optimal production mix decision for maximising business profits.

Question 12

What is the margin of safety?

Answer 12

the margin of safety measures the gap between the level of sales and the break-even point level of sales; the greater the margin, the less risk for the business

Question 13

What is the contribution of margin?

Answer 13

the amount of revenue that remains after deducing variable costs from the selling price; it represents the amount of money that is available to cover fixed costs and generate a profit

Question 14

What is the break-even point?

Answer 14

the total revenue equals the total costs, resulting in zero profit or loss

Question 15

What are some qualitative factors to consider when making special order decisions?

Answer 15

• price relative to competitor prices
• special order might attract repeat business in future
• customer loyalty impacted if customers hear about reduced selling price another customer receives for their special order
• customer loyalty may be impacted if business ceases production of current customer orders to fulfill special order, e.g. delayed order fulfilment

Question 16

What are some qualitative factors to consider when making shut down decisions?

Answer 16

• investor may view business as contracting; this reduces investor’s perception of future growth and therefore share price
• existing customers: shutdown of a store or product may reduce customer loyalty
• employee impact: store closure may result in employee redundancy or relocation
• competition: shut down could give competitors increased competitive advantage

Question 17

What are some qualitative factors to consider when making make or buy or decisions?

Answer 17

Make:
- better quality oversight
- can market as “locally manufactured”
- use of NCAs already purchased
- higher labour costs
- higher production costs
Buy:
- lower labour costs
- lower production costs
- lower quality oversight
- cannot market as “locally manufactured”
- NCAs already owned are not utilised

Question 18

What are some reasons behind a favourable material price variance?

Answer 18

• supplier price decreases through negotiation
• cheaper supplier
• cheaper material / lower quality
• market price of material decreased

Question 19

What are some reasons behind a favourable material usage variance?

Answer 19

• improvement in production process
• training staff
• recruitment of skilled staff
• higher quality materials leading to increased usage efficiency

Question 20

What are some reasons behind a favourable labour rate variance?

Answer 20

• outsourcing to cheaper labour
• entity negotiates lower wages
• minimum wage decreases
• unskilled workers hired and are paid less per hour

Question 21

What are some reasons behind a favourable labour efficiency variance?

Answer 21

• higher quality materials used decreases wastage
• improvement in production process
• hiring skilled workers reduces wastage
• training workers reduces wastage