AMA Q22 - Chapter 1

Question 1

What is the prime cost of a product/service?

Answer 1

The total value of all direct costs

Question 2

Another way of saying ‘Indirect Costs’

Answer 2

Overheads

Question 3

The two ways a factory cost centre can be categorised

Answer 3

1. Production centre - direct production of cost units
2. Service centre - servicing a production centre

Question 4

Three main methods of costing?

Answer 4

1. Absorption - All production costs are included in unit cost, including overheads
2. Marginal - indirect costs are not attributed to unit cost but go to P&L separately
3. Activity based -

Question 5

What does OAR stand for?

Answer 5

Overhead Absorption Rate

Question 6

How do you calculate OAR?

Answer 6

fixed cost value / activity level (i.e. machine hours)

Question 7

Over-absorption of overhead costs

Answer 7

actual costs were lower than expected

Question 8

Under-absorption of overhead costs

Answer 8

actual costs were higher than expected

Question 9

Another name for marginal costing

Answer 9

Variable costing

Question 10

What happens to fixed costs in marginal costing?

Answer 10

They are added as a cost to P&L for the period they were incurred; ignored

Question 11

What is the contribution?

Answer 11

revenue - direct costs (basically gross profit)

Question 12

Two ways contribution can be looked at

Answer 12

1. Unit level
2. Period level

Question 13

Does marginal costing factor fixed costs?

Answer 13

Only the variable element of fixed costs

Question 14

Is the value of inventory higher or lower using marginal costing?

Answer 14

Lower, because the inventory value does not include fixed costs

Question 15

Under absorption costing, is profit higher or lower under increasing inventory levels?

Answer 15

Higher, because fixed costs are spread across more cost units

Question 16

What happens to the fixed costs absorbed in closing inventory?

Answer 16

the fixed costs absorbed in the units are carried forward to the next accounting period

Question 17

Name an advantage of Marginal Costing

Answer 17

• Easier to understand in P&L
• Easier to isolate impact of variable costs
• No over or under absorption

Question 18

Name an advantage of Absorption Costing

Answer 18

• Shows the relationship between fixed costs and unit cost
• closing inventory value is accurate and in line with reporting standards

Question 19

How does capital expenditure become revenue expenditure?

Answer 19

Through depreciation