1. Fundamentals of Costing

Question 1

What is cost accounting?

Answer 1

Cost accounting (or management accounting) focuses on finding the cost of activities undertaken by a business during a specified period and quantifying the revenue and profits generated by those activities.

Question 2

What is the main concern of management accountants with regards to the information they provide?

Answer 2

Management accountants are tasked with the provision of information to assist management with planning, control and decision making.

Question 3

What are the major differences between financial accounts and management accounts? (7)

Answer 3

• Financial accounts are usually prepared for stakeholders external to an organisation
• Management accounts are usually prepared for internal managers of an organisation.

Question 4

Outline the diagram of how businesses can be divided into functions and departments with regards to production

Answer 4

Question 5

Define the production function of an organisation

Answer 5

Production functions - functions concerned with the production of goods / provision of services to customers

Question 6

Define the non-production function of an organisation

Answer 6

Non-production functions - functions not concerned with the production of goods / provision of services to customers such as administration, distribution and marketing

Question 7

Define the production department of an organisation

Answer 7

Production departments - departments directly involved in the production of the goods / provision of services to customers

e.g. Mixing, Baking and Finishing

Question 8

Define the service department of an organisation

Answer 8

Service departments - departments not directly involved in the production of the goods / provision of services to customers, but which support the production departments

e.g. Stores and Canteen

Question 9

What is another term for these departments?

Answer 9

Cost centres

Question 10

What is a cost object?

Answer 10

A cost object is anything for which we are trying to ascertain the cost, including (but not limited to):
* A unit of our product or service (e.g. one cake for BakeCo)
* A department or function for a certain time period (e.g. the Baking department for the prior week).
* A project (e.g. the installation of a new computer system).

Question 11

What is a cost unit?

Answer 11

The cost object that is usually most significant for organisations is a cost unit. This is typically one unit of the product or service that a business sells / provides to customers

Question 12

How can we determine if a cost object is a cost unit?

Answer 12

If you can say ‘cost per (object)’ and this is not too broad and provides useful information, then the object is a cost unit.

i.e. for a resturant ‘cost per resturant’ is too vague and doesn’t provide much detail so ‘resturant’ in this instance would be a cost object only, whereas ‘cost per meal served’ provides much more information and therefore ‘meals served’ is a cost unit

Question 13

What is a composite cost unit?

Answer 13

Cost units that require an additional unit in order to express the intended information

i.e. for a hospital the cost per patient will vary depending on the length of the patient’s stay, therefore monitoring costs on a patient/day basis would be more appropriate

Question 14

What are the elements of cost? (3)

Answer 14

• Materials
• Labour
• Other expenses (rent, rates, interest charges, etc.)

Question 15

How can we classify these cost elements?

Answer 15

Cost elements can be classified as direct costs or indirect costs as far as cost units are concerned.

Question 16

What is a direct cost?

Answer 16

A direct cost is a cost that can be traced in full to the cost unit.

Question 17

How can we further classify direct costs? Define each (3)

Answer 17

Question 18

What is prime cost?

Answer 18

The total direct costs - the sum of direct material cost, direct labour cost and direct expenses.

Question 19

What is an indirect cost?

Answer 19

An indirect cost (or overhead) is a cost that cannot be directly traced to individual units of the products produced

Question 20

How can we further classify indirect costs? Define each (2)

Answer 20

• Indirect production costs (or production overheads) - indirect costs incurred during the production of the product.
• Non-production overheads - Any costs not related to the production of the products

Question 21

How can we further classify indirect production costs? Define each (3)

Answer 21

Question 22

How can we further classify non-production overhead costs? Define each (2)

Answer 22

Question 23

Do we include non-production overhead costs in the calculations for production cost of one unit of product?

Answer 23

These costs will not be included when calculating the production cost of one unit of product (for the purposes of inventory valuation and cost of sales calculations). However, they will still need to be forecast, monitored, controlled and included in profit calculations for the organisation

Question 24

How can we classify costs with regards to behaviour patterns?

Answer 24

Costs can either be described as fixed, variable, semi-variable (aka semi-fixed or mixed) or stepped

Question 25

Define a fixed cost. Give some examples

Answer 25

A cost that, within a relevant range of activity levels, is unaffected by increases or decreases in the level of activity (units of product produced) such that the total cost incurred is constant

Examples include factory rent and supervisor salaries.

Question 26

Draw and explain the characteristic graphs for fixed costs showing how total cost and cost per unit changes as a function of volume of output (units produced)

Answer 26

1. total cost is unaffected by volume of output - the activity does not influence the total cost
2. cost per unit decreases as volume of output increases - the cost is being spread over more units

Question 27

Define a variable cost. Give some examples

Answer 27

A cost that increases or decreases as the level of activity increases or decreases, such that each additional unit of product produced incurs a constant additional cost.

Examples include direct materials and direct labour

Question 28

Draw and explain the characteristic graphs for variable costs showing how total cost and cost per unit changes as a function of volume of output (units produced)

Answer 28

1. total cost increases as volume of output increases - the more units produced the greater the total cost
2. cost per unit is unaffected by volume of output - even as we produce more units of our product, the cost per unit will remain constant

Question 29

Define a semi-variable (or semi-fixed/mixed cost). Give some examples

Answer 29

These costs have both a fixed and variable element. Hence, a minimum fixed cost will always be incurred (regardless of production levels), but the total cost will increase as the level of production increases.

Examples include electricity bills (a fixed standing charge plus a variable usage charge) and the cost of members of the sales team (a fixed basic salary and variable a unit commission for each additional unit of product sold).

Question 30

Draw and explain the characteristic graphs for semi-variable (or semi-fixed/mixed cost) showing how total cost and cost per unit changes as a function of volume of output (units produced)

Answer 30

1. total cost will intersect the y axis at the value determined by the fixed element of the cost and then increase linearly as volume of output increases due to the variable element
2. cost per unit will decrease as output activity increases (like a fixed cost), but will never reduce below our variable cost per unit

Question 31

Define a stepped cost. Give some examples

Answer 31

A fixed cost is only fixed for levels of activity within the relevant range, after which it could “step up”

For example, as our production volume increases we will eventually need to rent additional factory space, leading to an increased rental cost.

Question 32

Draw and explain the characteristic graphs for stepped costs showing how total cost changes as a function of volume of output (units produced)

Answer 32

Question 33

What is a responsibility accounting system?

Answer 33

A system that splits revenues and costs between different responsible staff members (usually managers)

Question 34

What is a responsibility centre?

Answer 34

A department or function whose performance is the direct responsibility of a specific manager

Question 35

How can we classify costs with regards to control and responsibility? Define each (2)

Answer 35

Question 36

Using the helpful acronym, what are the fundamental ethic principles? Define each (5)

Answer 36

PIPCO

Question 37

What are the common threats to the fundamental ethics principles? Define each (3)

Answer 37

Question 38

Define sustainability

Answer 38

The ability to meet the needs of current generations without compromising the needs of
future generations

Question 39

Using what three key headings can we consider sustainability? Give examples of each (3)

Answer 39

SEE

Question 40

Define ESG

Answer 40

ESG stands for Environmental, Social and Governance and focuses on a narrower
corporate view of sustainability and the impact of sustainability issues on businesses
(and their impact on people and the environment)

Question 41

What must a business determine what it considers ESG?

Answer 41

• Impacts: how its decisions positively and negatively affect environmental, societal and governance issues.
• Dependencies: how environmental, societal and governance issues can affect the business.
• Double materiality: how sustainability issues can materially affect the business (financial materiality), but also how the business can materially impact on people and the environment (impact materiality)