Chapter 2

Question 1

Definition of a Cost

Answer 1

A cost is the value of a resource used in:

• the manufacture of a product, such as, timber used to make a chair
• carrying out other business activities, such as, electricity used in an office

Question 2

Types of Cost

Answer 2

The costs of a business can be divided into three different types:

• fixed costs
• variable costs
• mixed costs

Question 3

Fixed Costs

Answer 3

Fixed costs in total, within a relevant range, do not change with the number of products manufactured sold.

Question 4

Relevant Range

Answer 4

The relevant range is the length of time that goes by before the costs of a business change, such as, an annual rent increase or the number of products the can be made or sold without a change in the costs of the business.

Question 5

Fixed Costs Examples

Answer 5

• rent
• insurance
• advertising
• depreciation of plant and equipment
• interest on loan
• the salary of an office manager

Question 6

Variable Costs

Answer 6

Variable costs in total, within a relevant range, change in proportion with the products manufactured or sold.

Question 7

Variable Costs examples

Answer 7

• raw materials

- the wages of employees who manufactured or sold.

Question 8

Mixed Costs

Answer 8

Mixed costs contains both a fixed and a variable component.

Question 9

Mixed Costs Examples

Answer 9

• electricity

- a telephone service

Question 10

Costs and Expenses

Answer 10

Costs become expenses and are included in an income statement in the accounting period in which they meet the Framework definition of an expense and the Framework expense recognition criteria.