1. Cost Behaviour And Classification

Question 1

What are the types of cost behaviour?

Answer 1

Variable costs
Fixed costs
Stepped fixed costs
Semi-variable costs

Question 2

How do you split a semi-variable cost?

Answer 2

The High-Low method.

1. Select the highest and lowest levels of activity
2. Work out the variance
3. Calculate the variable cost per unit
4. Calculate the fixed cost

Question 3

What are production costs?

Answer 3

All costs incurred producing units

Question 4

What are non-production costs?

Answer 4

All costs not incurred in the factory

Question 5

What is capital expenditure?

Answer 5

Expenditure on an item that will last for more than one year.

Question 6

What is revenue expenditure?

Answer 6

Expenditure on an item that will last for less than one year.

Question 7

What are production costs?

Answer 7

Direct costs (e.g. raw materials, wages of production workers)
Indirect costs (e.g. admin costs, marketing and selling costs, distribution costs, finance costs)

Question 8

What is the definition of material costs?

Answer 8

Anything physical that we buy for the business

Question 9

What is the definition of labour costs?

Answer 9

The cost of paying for the time of staff.

Question 10

What are expenses?

Answer 10

Anything that is not classed as material or labour

Question 11

What is another word for direct costs?

Answer 11

Prime costs

Question 12

What is another word for indirect costs?

Answer 12

Production overheads

Question 13

What are cost centres?

Answer 13

Collecting points for costs (e.g location, function)

Question 14

What are the types of factory’s cost centres?

Answer 14

Production cost centres

Service cost centres

Question 15

What are direct costs?

Answer 15

Costs that can be directly attributed to each unit.

Question 16

What are indirect costs?

Answer 16

Costs that have been incurred over a number of units

Question 17

What are the steps for absorption costing?

Answer 17

1) allocate indirect costs to individual cost centres
2) apportionment of indirect costs to cost centres
3) re-apportion service cost centres to production cost centres
4) absorption of overheads into cost units

Question 18

Overhead absorption rate =

Answer 18

Production overheads / activity level

Question 19

What is the difference between absorption costing and marginal costing?

Answer 19

Absorption costing included all production overheads whereas marginal costing only includes variable overheads.

Question 20

What does marginal costing look at?

Answer 20

Contribution per unit

Question 21

What is the calculation for contribution per unit?

Answer 21

Contribution per unit = selling price - variable costs

Question 22

What is marginal costing good for?

Answer 22

Short term decision making, it assumes that fixed costs would not be affected by our production over the next few weeks

Question 23

What is activity based costing?

Answer 23

What the overheads of a particular cost centre are split into different categories of overheads and are then absorbed by a number of different absorption bases.

Question 24

What are cost drivers?

Answer 24

Factors which cause the particular overhead to rise or fall

Question 25

Why is ABC good?

Answer 25

It is more realistic and gives a more meaningful cost per unit based on the usage of the business resources. It identifies the causes of the indirect cost and absorbed overheads based on the activity level that drives cost.