Chapter 2 : Cost classification and cost behaviour

Question 1

Capital expenditure includes:

Answer 1

Purchase of non-current assets

Improvement of the earning capability of non-current assets

Question 2

Revenue expenditure includes:

Answer 2

Purchase of goods for resale

Maintenance of the existing earning capability of non-current assets

Expenditure incurred in conducting the business

Question 3

Is the following Capital or revenue expenditure:

Extension to a building, Repairs to a building or machine, legal costs of buying a new factory, installation of new machinery, redecorating offices

Answer 3

Extension to a building - capital expenditure
repairs to a building or machine - revenue expenditure
legal costs of buying a new factory - capital expenditure
installation of new machinery - capital expenditure
redecorating offices - revenue expenditure

Question 4

Production costs examples

Answer 4

materials and labour
maintenance costs
supervision of work force

Question 5

non-production costs - selling an distribution costs

Answer 5

Advertising
delivery costs
staff salaries

Question 6

non-production costs - financing costs

Answer 6

all expenses associated with raising money to finance the business

Example - loan or overdraft

Question 7

Direct materials

Answer 7

materials incorporated into the finished product e.g. wood used in the construction of a table

Question 8

indirect materials

Answer 8

materials used in the production process but not incorporated into the product

Question 9

direct labour

Answer 9

wages paid to those workers who make products in a manufacturing business e.g. machine operators

Question 10

indirect labour

Answer 10

wages and salaries to other staff e.g. supervisors, storekeepers and maintenance workers

Question 11

Direct expenses

Answer 11

expenses that are identifiable with each unit of production e.g. patent royalties payable

Question 12

indirect expenses

Answer 12

expenses that are not spent on individual units of production e.g. rates, electricity and telephone

Question 13

Prime costs formula

Answer 13

Direct materials + direct labour + direct expenses

Question 14

Overheads formula

Answer 14

indirect materials + indirect labour + indirect expenses

Question 15

Fixed costs

Answer 15

total costs which remain the same as output increases

Question 16

variable costs

Answer 16

total costs increases as output increases

Question 17

Semi-variable costs

Answer 17

costs that contain elements of bopth fixed and variable costs also known as mixed costs

Question 18

stepped costs

Answer 18

costs remain the same up to a certain level of activity and then jump.

Question 19

Total Fixed cost formula

Answer 19

fixed cost per unit x number of units

Question 20

Total Variable cost formula

Answer 20

Variable cost per unit x number of units

Question 21

Total semi-variable cost formula

Answer 21

Fixed element + (variable cost per unit x number of units)

or the high - low method

Question 22

High-Low method

Answer 22

(Highest total cost - lowest total costs) / (highest output units - lowest output units) to find variable cost per unit

Total cost - variable cost = fixed cost

Fixed cost + variable cost = total costs