CIMA - Chapter 2.4 - Introduction to costing - inventory valuation and profit measurement

Question 1

What is the purpose of inventory valuation and profit measurement

Answer 1

For the purposes of inventory valuation and profit measurement, the cost accountant must calculate the cost of one unit.

The total cost of a cost unit is made up of the following three elements of cost.

1. Materials
2. Labour
3. Other expenses (such as rent and rates, interest charges and so on)

Question 2

What are Cost Elements

Answer 2

1. Cost elements provide a detailed structure for tracking and analyzing costs under each category in Classification by Nature
2. Cost elements can be classified as direct costs or indirect costs.

Question 3

What are direct costs

Answer 3

Question 4

What are indirect costs

Answer 4

Question 5

what is the difference between Direct vs. Indirect Labor

Answer 5

Question 6

Name the key Differences Between Direct and Indirect Costs

Answer 6

Question 7

Explain the Cost Elements for Material Costs

Answer 7

Question 8

Explain the Cost Elements for Labour Costs (Wages)

Answer 8

Question 9

Explain the Cost Elements for Expenses (overheads) Costs

Answer 9

Question 10

What are the Key Features of Expense as a Cost Element

Answer 10

Question 11

what is the Relationship Between Cost Elements and Costs By Nature Classification

Answer 11

Cost elements are used in classification by nature (e.g., material, labor, and expenses). They form the basis for grouping costs into broader categories such as direct costs and indirect costs:

• Direct Costs: Costs directly linked to production (e.g., direct materials, direct labor).
• Indirect Costs: Overheads not directly linked to production (e.g., administrative salaries, factory rent).

Question 12

What is the relationship between Cost Unit, Classification by Nature, and Cost Elements

Answer 12

Question 13

What are Prime Costs

Answer 13

Question 14

How Are Prime Costs defined

Answer 14

1. Prime costs are the direct costs incurred in the production of goods or services.
2. They include the costs of direct materials, direct labor and direct expenses

Question 15

What are the characteristics of Prime Costs

Answer 15

Question 16

What are indirect cost/overhead Costs

Answer 16

Indirect costs (or overhead costs) are “costs that are incurred in the course of making a product, providing a service, or running a department.

Question 17

What are the Key Features of Indirect Costs / overhead Costs

Answer 17

Question 18

What are the Types of indirect Costs / overhead Costs

Answer 18

1. Production Overheads - incurred in the factory from receipt of the order until its completion
2. Administrative Overheads - incurred in the direction, control and administration of an undertaking
3. Distribution Overheads - incurred in making the packed product ready for despatch and delivering it to the customer.
4. Selling overhead - expenses incurred in promoting sales and retaining customers

Question 19

Provide Examples of production overheads

Answer 19

Question 20

Provide Examples of Administration overheads

Answer 20

Question 21

Provide examples of Selling overhead

Answer 21

Question 22

What is Total expenditure

Answer 22

Question 23

What cost element is overtime

Answer 23

Indirect - Labour

Question 24

Whay is over time considered a indirect cost?

Answer 24

1. Fairness in Cost Allocation - Charging overtime premium directly to the products made during overtime can unfairly increase their cost compared to items made during regular hours.
2. Unpredictability - Overtime is not a consistent or predictable cost, making it difficult to trace directly to a single product or project.
3. Accounting Standard Practices - Treating overtime premium as an overhead aligns with established accounting principles for cost allocation and reporting.

Question 25

How is Overtime allocated

Answer 25

Spread Over All Production - Treat overtime premium as an overhead to spread the cost across all production or operations.

Question 26

How do Cost Unit, Classification by Nature, and Cost Elements work together?

Answer 26

Question 27

Provide examples of Distribution overhead

Answer 27

Question 28

Key Differences Between Product Costs and Period Costs

Answer 28