Chapter 2 Cost Classification

Question 1

What is Prime Cost?

Answer 1

The total of direct costs (the cost which can be ascertained to the cost unit)

Question 2

What is the Marginal Cost?

Answer 2

Total of direct and variable costs

Question 3

What is the Absorption Cost?

Answer 3

Total production cost

Question 4

What are the ways we can classify costs?

Answer 4

Element
Function
Nature

Question 5

How do we classify costs by Element?

Answer 5

Materials (Raw materials or costs of goods sold)

Labour (basic pay, overtime,etc.)

Expense (other business costs eg. Rent)

Question 6

How do we classify costs by function?

Answer 6

Production costs (cost to make product/ service eg. Raw materials, rent on factory, machine workers wages)

Non production costs (cost that are not occurred to directly make product/service eg. Sales team wages, distribution costs)

Question 7

How do we classify cost by nature?

Answer 7

Direct costs (related to a cost unit)

Indirect costs (cannot be related to a cost unit)

Question 8

What is a Semi-Variable cost?

Answer 8

A cost with a a fixed and variable element eg. A phone bill that has a fixed standing charge then a variable cost based on usage