Chapter 1

Question 1

What can a company do once it has identified its cost per unit of production? Why is it useful for a company to identify its cost per unit of production?

Answer 1

1) It allows it to set its selling price
2) It allows it to value its inventory
3) It can identify costs that can be reduced
4) It can set cost targets for it staff (i.e. the production staff can be set a target of making 6 sandwiches per minute)
5) These targets can be used to review and improve actual performance

Question 2

When costs are classified by NATURE, they are split between…

Answer 2

direct and indirect costs

Question 3

When costs are classified by FUNCTION, they are split between…

Answer 3

Production and non-production costs

Question 4

When costs are classified by BEHAVIOUR, they are split between…

Answer 4

Variable, fixed, semi-variable or stepped costs

Question 5

How does an indirect cost differ from a direct cost?

Answer 5

A direct cost is traceable to a single unit of production. This could be the number of wheels needed for a car. An indirect cost is a cost that cannot be directly attributed to a single unit of production. This could be stationary for the office, or wages for the security staff.

Question 6

How does a production cost differ from a non-production cost?

Answer 6

A production cost is incurred in the process of producing units, i.e. direct materials, electricity to run production machinery or wages of production staff. A non-production cost are not specific to the production process - i.e. selling and distribution costs, administration expenses and finance charges.

Question 7

Are direct costs always production costs?

Answer 7

Yes

Question 8

Are indirect costs always production costs?

Answer 8

No - indirect costs can sometimes be production costs - for example, the wages of a factory supervisor cannot be directly linked to the production of an individual unit (so they are not indirect costs) but they are costs of production because their wages are required to produce the individual units. But also, you can have indirect costs that are non-production costs - i.e. the wages of the management accountant.

Question 9

Can you have a direct non production cost?

Answer 9

No - direct costs can always be tied to a unit of production - if a cost can be directly attributed to a unit of production, it must be a cost of production.

Question 10

Are the salaries of factory supervisors indirect production costs?

Answer 10

Yes

Question 11

Are the salaries of the management account direct production costs?

Answer 11

No

Question 12

Is the factory rent charge an indirect production cost?

Answer 12

Yes

Question 13

Is the cost of advertising a product an indirect production cost?

Answer 13

No

Question 14

Are raw materials a direct production cost?

Answer 14

Yes

Question 15

Is the salary of a machine operative a direct cost of production?

Answer 15

Yes

Question 16

Is a cost card a summary of the costs involved in producing a unit of a product?

Answer 16

Yes

Question 17

Is a cost unit a product or service for which costs are being allocated and gathered together in a cost card?

Answer 17

Yes

Question 18

Is a cost centre a division or department where costs are being allocated or gathered together?

Answer 18

Yes

Question 19

How can you judge the performance of a manager who works in a department where he controls an investment centre?

Answer 19

Return on capital employed - this ways up the amount of profit generated per £ of investment.

Question 20

Do variable costs vary with the volume of production?

Answer 20

Yes

Question 21

Does the variable cost per unit increase or decrease when production increases?

Answer 21

It does neither - it stays the same

Question 22

Does the fixed cost per unit increase or decrease when production increases?

Answer 22

It decreases - you have the same cost spread over more units

Question 23

Do semi variable costs have a fixed element and a variable element?

Answer 23

Yes

Question 24

How do stepped costs work?

Answer 24

The cost increases in a line with a certain variable - for example, if there must be 1 supervisor per 10 factory workers, each time we employ our 11th or 21st worker our supervisor cost will step up.

Question 25

How does the high low method work?

Answer 25

Difference in cost at high and low output / difference in units produced at high and low output = variable cost per unit.

Then rearrange the formula;

Total cost = fixed cost + variable cost per unit * production volume

so that;

Fixed cost = Total cost - variable cost per unit * production volume

With this information you can estimate the semi-variable cost to produce a given number of units.