Chapter 1 Cost Behaviour

Question 1

What are the types of costs?

Answer 1

Variable costs
Fixed Costs
Stepped fixed cost
Semi variable (mixed) cost

Question 2

How do variable costs behave?

Answer 2

Vary with level of activity
Assumes cost per unit is constant
Can be traced to each unit of production

Question 3

How do fixed costs behave?

Answer 3

Do not change with level of activity
Cost is incurred for a time period
Example: Rent on premises

Question 4

How do step fixed/semi-fixed costs behave?

Answer 4

Fixed for a range of activity
Step up once next range is reached
Example: Supervisor cost, 1 super per 10 employees.

Question 5

How do semi variable(mixed) costs behave?

Answer 5

Contain both fixed and variable cost elements
Partially effected by changes in activity level
Example: Phone bill with line rental and call charges

Question 6

How are the fixed and variable components of semi variable costs calculated?

Answer 6

1. Calculate the difference in activity and cost between lowest and highest activity
2. Variable cost per unit is cost difference/activity difference
3. TC=FC+(VC per unit x volume of production)

Question 7

How can the fixed and variable costs be calculated fir step fixed costs?

Answer 7

Use the high-low method as with semi variable costs

Apply the method to two activity levels on the the same side of the step

Question 8

What other ways are there of classifying costs?

Answer 8

Capital v Revenue expenditure
Cost by function i.e Production and non production costs
By Element - Materials, Labour and expenses
By Nature - Direct(traceable) and indirect (Shared)

Question 9

What is a cost Center

Answer 9

A Collecting point for costs
Could be a location or function
Costs for the Center must be able to relate to the cost units being produced.

Question 10

What other type of responsibility Center are there?

Answer 10

Revenue Center - Where manager has control over revenue only
Profit Center - Where manager controls both costs and revenues
Investment Center - Similar to first two but manager is also responsible for investment decisions

Question 11

What are the steps in absorption costing?

Answer 11

1. Allocate direct costs directly to cost units
2. Allocate indirect costs that relate to a single cost Center
3. Apportion indirect costs that relate to several cost centres on an appropriate basis.

Question 12

How is Overhead Absorption rate calculated?

Answer 12

OAR = Production Overhead/Activity Level

Question 13

How is the appropriate activity level for calculating OAR decided on?

Answer 13

Cost per unit - all units produced are identical
Cost per labour hour - were many different products are made using mostly manual processes
Cost per machine hour - Where many different products are made using mostly machine processes

Question 14

What is marginal costing?

Answer 14

Marginal costing only includes variable production costs on the cost card.
Fixed production costs are attributed to the relevant period

Question 15

What is activity based costing?

Answer 15

Where overheads of a cost Center are split in to cost pools and then absorbed using different cost drivers

Question 16

What is breakeven analysis?

Answer 16

This is done in relation to marginal costing to establish the activity level the business must reach to “break even” .i.e. make no profit or loss

Question 17

How is the break even point in units calculated?

Answer 17

Volume of Sales to break even=

Fixed costs/ Contribution per unit…

Contribution is Selling price less variable cost

Question 18

What is limiting factor analysis

Answer 18

This is where the limiting factor is identified and then and optimal production plan created

Question 19

How is limiting factor analysis approached?

Answer 19

1 Identify the limiting factor
2 Calculate the contribution per physical unit
3 Convert 2 in to contribution per unit of limiting factor
4 rank products according to result from 3 and plan production from there.

Question 20

What is a future cost?

Answer 20

A future cost will be incurred in the future as the result of a business decision
It cannot be a cost already occurred or that would be incurred irrespective of the business decision.

Question 21

What is an Incremental cost

Answer 21

This is a cost which would be avoidable if the decision were not implemented.
E.g. Advertising budget for a new product, if the product was not launched the cost would not be incurred.

Question 22

Cash Cost

Answer 22

Incurred and out flow of cash from the business and is not an accounting transaction
E.g. Purchase of new machinery not depreciation of machinery.

Question 23

What is the purpose of NPV (Net Present Value) analysis?

Answer 23

To establish to present value of cost to the business that will Be occurred in the future by using Discounted cash flows (DCF)

Question 24

What are discount factors and how are they used?

Answer 24

These are figures that take in to account the time value of money and are expressed as decimals.
Multiply cash flow by discount factor to get the Net present value.

Question 25

What is the business use of NPV Analysis?

Answer 25

This can be used to decide on investment or to make a lease/buy decision.
If NPV is positive the investment will be profitable.

Question 26

What is Net terminal cost?

Answer 26

This is where a project is looked at in terms of cost at its end point instead of the start.
Costs are compounded instead of discounted.

Question 27

What is target costing and what other terms may arise in relation to this?

Answer 27

It is costing method which works out the maximum allowable cost of a product from the sales price and profit margin required.
It may be referred to in relation to Value engineering and value analysis.

Question 28

What is the line of best fit or regression equation?

May also be referred to as least squares regression line.

Answer 28

Y=a+bx 
Where y is total costs incurred
X - the production volume achieved
A - fixed cost regardless of output
B - variable cost per unit

Question 29

What are the two models that can be used to combine trend and seasonal variation?

Answer 29

Additive - TS=T+SV
Multiplicative - TS=TxSV

T is trend and SV is seasonal variation.

Question 30

What are index numbers?

Answer 30

A simple way of showing ow a figure is changing over time expressed as a percentage figure with a starting point of 100%

Question 31

How can an index value be calculated?

Answer 31

Price now/price in base period x 100.

Base period is when the index was started.