Chaper 1 - Cost classification & behaviour

Question 1

COST BEHAVIOURS

Answer 1

•Fixed - does not change with the activity of the business.
Example: Rent or insurance

•Stepped - remains fixed until a certain activity level.
Example: Supervisor costs

•Variable - cost per unit remains the same.
Example: Direct material or direct labour

•Semi Variable - Fixed & variable cost combined.
Example: Factory electricity
^Uses the high-low method

Question 2

VARIABLE COST

Answer 2

•Costs that vary (i.e. rise and fall) with output (e.g. materials, labour cost per hour)
Example: Direct materials or direct labour (the workers)

•Cost per unit will remain the same

Question 3

FIXED COSTS

Answer 3

Are costs that will not vary with output. These are often referred to as fixed overheads (e.g. rent and rates)

Remains at a constant level regardless of the activity level.

Question 4

STEPPED FIXED COSTS

Answer 4

Are costs that remain fixed for a certain level of output and then increase until a further level of output is reached. They then become fixed again until output levels reach another point, then increase again (e.g. supervisors’ salary and rent)

Example: A factory - when it’s reached it’s full capacity holding, the business will need to buy another property/larger factory.

Question 5

SEMI-VARIABLE (MIXED) COSTS

Answer 5

Are costs which are part fixed and part variable, and are therefore partly affected by changes in the level of activity (e.g. a telephone bill has a fixed element related to line charges, and a variable element relating to usage).

^ Before a call is even made, there’s a cost incurred for having the landline.

Question 6

HIGH LOW METHOD FOR SEMI-VARIABLE COSTS

Answer 6

Step 1. Select the highest and lowest activity level and their costs.

Step 2. Find the difference in the output and costs
^ Always cost - output

Step 3. Calculate the variable cost per unit.
^ Difference in cost / difference in units

Step 4. Calculate the fixed cost
^ Total cost - (VCPU x units)

Question 7

CAPITAL EXPENDITURE

Answer 7

• The purchase of non-current assets.
Example: buying a machine

• The improvement of the earning capability of non-current assets.
Example: upgrading a machine

Question 8

REVENUE EXPENDITURE

Answer 8

• The purchase of goods for resale.

• The maintenance of the existing earning capacity of non-current assets.
Example: electricity usage on a machine

• Expenditure incurred on conducting the business.
Example: standard expenses

Question 9

COST CLASSIFICATION BY FUNTION

Answer 9

Total Cost

• Production cost - costs associated with the production of goods and services from the supply of raw materials to the warehousing of finished goods.

• Non-production costs - all other costs incurred in the business.
Example: Office costs

Question 10

PRODUCTION COSTS

Answer 10

• Materials - cost of materials that are used in making the product or service.
• Labour - cost of the workforce used in making the product.

• Overheads (cost/expense) - cost of any overheads required to support the production process.
A necessary cost to keep production going.
Example: electricity bill or factory rent

Question 11

NON-PRODUCTION COSTS

Answer 11

• Administration - all other costs incurred in managing the organisation.
Example: accounts staff salaries

• Marketing - all costs incurred in promoting and retaining customers.
Example: advertising or sales staff salaries, as they are there to promote the business and sell a product.

• Distribution - all costs incurred in making the packed product ready for despatch and delivery to the customer.
Example: warehouse or delivery driver salaries or van fuel

• Finance - all costs incurred to finance the business.
^ not always relating to the finance department.
Example: interest charges on loan amount borrowings (if the business took out a loan).

Question 12

DIRECT COSTS

Answer 12

Are costs which can be specifically identified with, and allocated to, a single cost unit.

• They are often variable costs (e.g. materials cost per unit)
• Can sometimes be fixed (e.g. tool hire)

Question 13

PRIME COSTS

Answer 13

Are the totals of all direct costs in manufacturing a product/providing a service

Question 14

INDIRECT COSTS

Answer 14

Are costs which are incurred in the course of making a product/service, but which cannot be identified with a particular cost unit.
^ Normally referred to as overheads

-Mainly fixed costs, but can be variable such as oil for machinery.

Question 15

COST CENTRE

Answer 15

Are areas of the business where costs are incurred, such as factory or canteen.

Question 16

PRODUCTION COST CENTRES

Answer 16

Are directly involved in the production or provision of the cost unit.
E.g. the assembly department

Question 17

SERVICE COST CENTRES

Answer 17

Are not involved in the production or provision of cost units, but are needed to support or service the production cost centers.
E.g. the canteen

Question 18

PROFIT CENTRE

Answer 18

Are accountable for costs and revenues

Question 19

REVENUE CENTRE

Answer 19

Are accountable for revenue only

Question 20

INVESTMENT CENTRE

Answer 20

Are profit centers with additional responsibilities for the capital investment.

Question 21

ABSORPTION COSTING

Answer 21

All production costs are included in the costing of a cost unit.
E.g. direct materials/labour, variable production overheads & fixed production overheads

Question 22

MARGINAL COSTING

Answer 22

Only the variable costs of production are included in the cost per unit. The fixed overheads are treated as period costs and not as part of the cost unit.
Cost unit would consist of direct materials/labour & variable production overheads.

The fixed overheads are charged to the SOPL as an expense for the period.

Question 23

ACTIVITY BASED COSTING

Answer 23

Is a method of aborption costing which uses more sophisticated methods of allocating overheads to cost units.
It considers the activities that cause the overhead to be incurred and the factors that give rise to the costs (cost driver)

Question 24

Overhead absorption rate

Answer 24

Is an estimated amount of fixed production overhead used to produce one cost unit

Question 25

COST POOLS

Answer 25

Are breakdowns of total overheads into different categories depending on the activity that has generated the cost.

Question 26

COST DRIVERS

Answer 26

Are factors that drive a change in the usage of an activity.