6. Costing - Nature and classfication

Question 1

What are product costs

Answer 1

Direct materials, direct labour and manufacturing OH

Question 2

What are prime costs?

Answer 2

Include all direct costs (DM and DL)

Question 3

What are conversion costs?

Answer 3

Converts DM into the finished product (DL and MOH)

Question 4

What are period costs?

Answer 4

Non-manufacturing costs - all costs that are not a product cost (selling and admin)

Question 5

What are variable costs?

Answer 5

Costs that vary in proportion to changes in activity - for each unit of activity, the variable cost per unit is constant, but the total variable cost increases for each unit.

Question 6

What are fixed costs?

Answer 6

Remains constant regardless of the level of acitivity, but if it is reported on a per unit basis, then it decreases with the number of units produced.

Question 7

What is the approach to cost estimation?

Answer 7

High-low method:

Highest Activity Cost - Lowest Activity Cost / Change in activity