Chapter 2

Question 1

What is the ultimate purpose of a costing system?

Answer 1

to enable the cost of making a product or providing a service to be readily identified.

Question 2

Define Cost Object

Answer 2

A cost object is ‘for example a product, service, centre, activity, customer or distribution channel in relation to which costs are ascertained

Question 3

What are examples of a:
product
services
centre
activity
customer
distribution channel

Answer 3

product - kitkat
services - a course
centre - sales department
activity - purchase ordering
customer - student
distribution channel - shops, internet, mail order

Question 4

Define Cost Centre

Answer 4

Cost centre. Any unit such as division, department or a group of employees, to which costs are assigned or allocated.

Question 5

What are other types of business division

Answer 5

Profit centres – responsibility for operating costs and revenues (i.e. the statement of profit or loss)

Revenue centres – responsibility to generate revenues only (no cost monitoring)

Investment centres – responsible for operating costs and revenues plus capital investment spending (i.e. new asset purchases etc)

Question 6

What is a Cost Unit

Answer 6

A cost unit is a ‘unit of product or service in relation to which costs are ascertained’

Question 7

In management accounting how do you define departments by which the business is split?

Answer 7

Cost centres

Question 8

What are examples of cost units?

Answer 8

-Chargeable hour
-Patient/day
-Tonne/kilometre

Question 9

In management accounting how do you define products you make

Answer 9

Cost unit

Question 10

What is a composite cost units?

Answer 10

When there are two elements to the cost unit

Question 11

What is historic cost?

Answer 11

The historic cost of an item is what accountants usually use when producing accounts.

It represents the costs that have actually been incurred and recorded

Question 15

What is a cost classification?

Answer 15

Cost classification is the ‘arrangement of elements of cost into logical groups with respect to their nature (fixed, variable, value adding), function (production, selling) or use in the business of the entity’.

Question 16

What are the main costing terminologies?

Answer 16

1) Direct Cost
2) Indirect Cost
3) Production Overheads
4) Non-production Overheads

Question 17

Define Direct Cost

Answer 17

A direct cost is ‘expenditure that can be attributed to a specific cost unit, for example material that forms part of a product’.

Question 18

Examples of Direct Costs

Answer 18

Direct Materials e.g. metal

Direct Labour e.g. wages of production line workers

Direct Expenses e.g. hire of equipment for a specific job

Question 19

What is the total of all direct costs known as?

Answer 19

Prime Cost

Question 20

Define Indirect Cost

Answer 20

An indirect cost or overhead is ‘expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit’.

These generally can be split into production overheads and non=production overheads

Question 21

What are examples of production overheads

Answer 21

Indirect materials
–materials used in small quantities e.g. screws

Indirect wages
-supervisor’s salary

Indirect expenses
–rents, rates, depreciation

Question 22

If labour (either direct or indirect) involves overtime to complete a job, then any premium paid over and above the normal pay rate will generally be classified as…

Answer 22

an indirect cost, unless the following apply

1) The customer has required the overtime to specifically be worked in order to get their job done quickly. In this instance, the overtime premium would be charged as a direct cost to the job.

2)The overtime is regularly worked, in which case the premium paid to direct workers could be built in to the direct labour hour rate.

Question 22

What are examples of non-production overheads

Answer 22

Admin
-salaries for head office staff

Selling
-brochures, flyers

Distribution
–Running costs of transport lorries

Question 23

What type of cost are bonuses?

Answer 23

If a bonus is paid that relates to a specific job, it should be charged to
that job.

If it depends on performance generally over a set time period, it should be charged as an indirect cost.

Question 24

What are the two common classifications of costs for planning and control purposes?

Answer 24

Controllable costs - those costs that management can influence

Uncontrollable costs - those costs that management cannot within the current time period

Question 26

What are the three common classifications of costs for decision making?

Answer 26

Variable Costs - costs that change as the volume of activity changes

Fixed Costs - costs that do not vary with activity

Semi-fixed, semi-variable, mixed costs
–certain costs may contain both a fixed part and a variable part

Question 27

What are other relevant terminology

Answer 27

-Full production cost

-Full Cost

-Marginal Cost

-Period Cost

Question 28

Define ‘full production cost’

Answer 28

The total of all production costs (material, labour and production overheads generally).

Question 29

Define ‘full cost’

Answer 29

The total of all production and non-production costs (including admin, selling and finance costs).

Full cost = Prime cost + Full production cost

Question 30

Define ‘Period cost’

Answer 30

A cost that is linked to a time period (e.g. the yearly rent on a building) rather than directly to a unit of product or service.

Question 30

Define ‘Marginal Cost’

Answer 30

The amount by which the total cost increases if one more unit of a product is made (a very useful figure for decision making).