Chapter 28 Costing for materials, labour and overheads

Question 1

What is management accounting?

Answer 1

Managerial accounting is the practice of identifying, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organisations goals.

Question 2

What is cost accounting?

Answer 2

Cost accounting is a form of managerial accounting that aims to capture a company’s total cost of production by assessing the variable costs of each step of production as well as fixed costs

Question 3

What are direct costs?

Answer 3

These are costs directly associated with the production process. Eg; direct materials, carriage inwards, direct labour, direct expenses.

Question 4

What are indirect costs?

Answer 4

These are costs that are indirectly associated with the production of goods. Eg; Indirect materials, indirect wages; supervisors, cleaners, stores staff, overhead costs

Question 5

What are product costs?

Answer 5

Product cost refers to the costs attributed to create a product.

Question 6

What are period costs?

Answer 6

Period costs refer to costs that are not tied to or related to the production of goods. These costs can’t be attributed to the production of goods.

Question 7

What are variable costs?

Answer 7

Variable costs vary in direct proportion to the level of output.

Question 8

What are fixed costs?

Answer 8

These costs remains constant and doesn’t change with the level of output.

Question 9

What are step costs?

Answer 9

These costs remains constant within a specific level of output and increases when the output increases beyond that limit.

Question 10

What is a cost centre?

Answer 10

It is department within a business to which costs can be allocated. It may also be an item of equipment, or even a person.

Question 11

What is a cost driver?

Answer 11

The direct cause of a cost.

Question 12

What is a cost unit?

Answer 12

A unit of production to which the management wishes to collect the costs incurred.

Question 13

What is a contribution cost?

Answer 13

The amount of earnings remaining after all the direct costs have been subtracted from revenue.

Question 14

Why is inventory valuation needed?

Answer 14

Inventory valuation is done at the end of every financial year to calculate the cost of goods sold and the cost of the unsold inventory.

Question 15

Explain the valuation of inventory using the First in First out (FIFO) method.

Answer 15

Goods are assumed to be used in the order in which they are received from the supplier.

Question 16

What is AVCO ?

Answer 16

Under this method a new average value is calculated each time a new a new purchase of inventory is acquired.

Question 17

Explain the process of calculating inventory based AVCO.

Answer 17

We calculate the weighted average cost every time new inventory is purchased.
We do so by adding up the total price of the products at their original values and the total products as at that date.
Then we divide the total value of the products by the number of units.

Total price/ Total units

Question 18

What are semi variable costs?

Answer 18

They are costs that have the elements of both a fixed and variable cost.

Question 19

What are the advantages of FIFO?

Answer 19

• It is a simple system to use
• It is realistic, as materials are normally used in FIFO method, especially if goods are perishable
• The prices are valued at prices that have actually been paid for.
• The closing inventory is valued at current prices.

Question 20

What are the disadvantages of FIFO?

Answer 20

• Manufacturing businesses may charge materials to production at current purchase prices, but use FIFO to value inventory in the financial statements.
• Identical items bought from batches at different times and prices may result in unreliable job quotations.
• In times of rising prices, closing inventory in the financial accounts will be priced at high prices, lowering Cost of sales which results in a high gross profit. This violates the prudence concept.

Question 21

What are the advantages of AVCO?

Answer 21

• AVCO recognises that identical items purchased at different times and prices have identical values.
• The use of average prices avoids the inequality of identical items being charged to different jobs at different prices.
• Average costs may smooth variations in production costs and comparisons between the results of different periods.
• Average prices used to value closing inventory may be fairly close to the latest prices.

Question 22

What are the disadvantages of AVCO?

Answer 22

• The average price must be recalculated after every purchase of inventory.
• The average price does not represent any price actually paid for inventory.

Question 23

How to calculate the cost per unit when an hourly rate is given?

Answer 23

Divide the rate per hour by the number of units produced in an hour.

Question 24

What are the ways in which labour is paid?

Answer 24

• hourly rate
• piece rate
• annual salary

Question 25

What is a production cost centre?

Answer 25

Production cost centres are directly involved in producing goods.

Question 26

What is a service cost centre?

Answer 26

These centres are not involved in producing goods, but provide services for the production cost centres.

Question 27

What does it mean to allocate costs?

Answer 27

Charging costs directly to the cost centres which can be directly identified with them.

Question 28

What does it mean to apportion costs?

Answer 28

The process of charging costs to cost centres using a suitable basis. Such costs cannot be directly identified with a single cost centre.

Question 29

Why are service cost centre costs apportioned to production cost centre?

Answer 29

Their costs must be re-apportioned to production cost centres so that their overheads can be absorbed into the final product.

Question 30

What is an overtime payment?

Answer 30

An amount paid for an employee for working longer than the time expected.

Question 31

What is a bonus payment?

Answer 31

It is the additional amount paid to an employee for producing a product in a time less than that allowed.

Question 32

What are the advantages to a firm of of offering overtime payments?

Answer 32

Provided the work is of the required standard, it will increase productivity.
It will give the firm a greater number of units to sell, and overall may increase profit.

Question 33

What are the disadvantages of overtime payments?

Answer 33

It may cause workers to rush the production at the expense of quality.
if the extra units cannot be sold, a loss will be incurred

Question 34

How to calculate overhead absorption rates OARs?

Answer 34

Total overhead / basis of absorption

Question 35

What must we do if two basis of absorption are given for one cost centre?

Answer 35

Choose the basis with the greater value, this shows that production was more intensive in that basis.

Question 36

How do we use cost and markup to find the selling price of a product?

Answer 36

We multiply our Selling price (x) by the markup percentage to solve for X.

Cost + Markup = Selling price

Question 37

What are prime costs?

Answer 37

Prime costs refer to the costs directly associated with producing a product, namely, raw material and labor costs.

Question 38

When does over absorption of overheads occur?

Answer 38

It occurs when the budgeted overheads are greater than the actual overheads.
actual production is more than the planned level

Question 39

When does under absorption occur?

Answer 39

when budgeted overheads are less than the actual overheads

when production is less than the planned level.

Question 40

How do you calculate the over/under absorption of overheads?

Answer 40

First we calculate the OAR
Secondly we multiply the OAR by actual labour/machine hours
And then we find the difference between the actual overheads and the overheads calculated using the OAR