Chapter 1

Question 1

Cost behaviour patterns

Answer 1

Based on fluctuations in the level of activity

Question 2

Period costs

Answer 2

A fixed cost incurred according to time elapsed rather than the level of activity

Question 3

Curvilinear variable cost

Answer 3

VC doesn’t approximate a linear function e.g. economies of scale/discounts

Question 4

Why calculate OAR at a budgeted rate?

Answer 4

1. Inconvenient to wait until the end of the period
2. Enables estimation of a price
3. Smooths variations in overheads throughout the year

Question 5

Advantages of Absorption Costing

Answer 5

UIFA

1. Includes fixed production costs
2. Follows accruals concept by CF inventory value to net off with sales when sold
3. Inventory needs to include fixed overheads for the SOPF
4. Under/over absorption shows inefficient utilisation of production resources

Question 6

Disadvantages of Absorption Costing

Answer 6

1. Arbitrary apportionment and absorption

2. Profits vary within change in production - encouraged to increase closing inventory and overstate profits

Question 7

Advantages of Marginal costing

Answer 7

1. FC treated as what they are, period costs
2. More relevant in short-term decision making
3. Simple

Question 8

Disadvantages of Marginal costing

Answer 8

1. Insufficiency and inadequate where FC or overheads are in high proportion
2. Not useful in the long term
3. Treatment of direct labour costs as variable costs is unrealistic

Question 9

Profit difference between MC and AC in the short and long term:

Answer 9

Short Term: change in inventory x OAR

Long Term: They will be the same as eventually all costs will be charged against sales

Question 10

Throughput

Answer 10

The amount of material or items passing through a system or process

Question 11

TFC

Answer 11

Total factory costs or conversion costs - fixed manufacturing costs

Question 12

Investment

Answer 12

All the money the business invests to buy the things that it intends to sell and all the money tied up in assets so that the business can make the throughput.

It includes unused raw materials, WIP and unsold finished goods.

Question 13

Operating Expenses

Answer 13

All the money the business spends to produce the throughput (i.e. to turn inventory into throughput). Costs that are not totally variable but not correct to think of them as fixed.

Question 14

The concepts of throughput accounting:

Answer 14

1. Throughput
2. Inventory (or investment)
3. Operating Expenses

Question 15

Similarities and differences with TA

Answer 15

Similar to MC but can be used to make longer term decisions about capacity / production equipment.

Radically difference from MC AC and ABC because the concept of product cost is rejected. There is no attempt to change the opex to products.

Question 16

Criticisms of TA

Answer 16

1. Concentrates on short term where a business has a fixed supply of resources and open and largely fixed
2. More difficult to apply over longer term where costs are more variable