Cost Accounting (Chapter 10) [P2]

Question 1

Types of manufacturing costs

Answer 1

• material costs
• labour costs
• factory overheads

Question 2

Definition of material costs

Answer 2

Costs of all raw materials used in the manufacture of product

Question 3

What are direct material costs?

Answer 3

Costs of all raw materials used directly in the manufacture of products (eg. zips, buttons, fabric to make a dress)

Question 4

What are indirect material costs?

Answer 4

Cost of raw materials used in the manufacturing process that are either not directly identifiable in the finished product or an insignificant part of the finished product. They form part of factory overheads (eg. oil for sewing machine or thread to stitch dress)

Question 5

Definition of labour costs

Answer 5

Costs of all labour involved in the manufacture of a product

Question 6

What are direct labour costs?

Answer 6

Aka “touch labour”, salaries and wages paid to employees directly involved in the manufacture of products. Their work is directly identifiable in the production process

Question 7

What are indirect labour costs?

Answer 7

Salaries and wages paid to employees not directly involved in the manufacture of a product. Forms part of factory overheads (eg. factory supervisor or dress designer)

Question 8

Definition of factory overheads

Answer 8

Costs of manufacturing process not directly identifiable with a specific product, all costs of production excluding direct costs (eg. indirect material and labour, water and electricity, factory rental, depreciation of machinery)

Question 9

Definition of sales and distribution cost

Answer 9

Costs incurred in marketing, distributing, selling manufactured products

Question 10

Definition of administrative cost

Answer 10

Costs incurred in administering manufacturing business

Question 11

Definition of period costs

Answer 11

Costs related to running business, not to manufacturing process. It decreases net profit, but isn’t taken into account when cost price of product is calculated (eg. sales and distribution cost, finance cost, administrative cost)

Question 12

What is the prime cost?

Answer 12

Total direct costs involved in manufacturing process

Question 13

What is the total manufacturing cost?

Answer 13

Aka cost of production, is the sum of all costs involved in the manufacturing process

Question 14

What is the unit cost?

Answer 14

The cost price of one individual unit of a product

Question 15

Prime cost calculation

Answer 15

Prime cost = direct material cost + direct labour cost + other direct costs

Question 16

Total manufacturing cost calculation

Answer 16

Total manufacturing cost = prime cost + factory overheads

Question 17

Unit cost calculation

Answer 17

Unit cost of product = total manufacturing cost / number of units produced

Question 18

Definition of cost behaviour

Answer 18

Behaviour of a specific manufacturing cost in relation to changes in production levels (number of units produced)

Question 19

Manufacturing cost groups according to cost behaviour

Answer 19

• fixed costs
• variable costs
• semi-variable costs
• semi-fixed costs (step costs)

Question 20

What are fixed costs

Answer 20

Costs that don’t vary according to changing levels of production, and remain constant at all levels of production, even if no units are produced (eg. factory rent)

Question 21

What are variable costs

Answer 21

Costs that vary according to the number of units produced and are directly proportional to the level of production. (eg. direct material and labour costs)

Question 22

What are semi-variable costs

Answer 22

Costs that start at a fixed minimum cost that is incurred regardless of production levels, but increases as production increases (eg. electricity cost)

Question 23

What are semi-fixed costs

Answer 23

Costs that are fixed up to a certain level of production, if production exceeds this level, then these costs increase in steps (eg. a machine can produce 1000 units a day, if production exceeds this, a new machine must be bought)

Question 24

Total manufacturing cost calculation

Answer 24

Total manufacturing cost = fixed costs + variable costs

Question 25

What is the break-even analysis?

Answer 25

It is used to determine the number of units of a product that need to be produced and sold for the income from sales to equal the manufacturing costs (no profit nor loss)

Question 26

How to calculate break-even point

Answer 26

1. Split costs into fixed and variable cost per unit
2. Calculate the difference between selling price per unit and variable costs per unit to get the contribution
3. Divide fixed costs by contribution to get break-even point

Question 27

What is the contribution?

Answer 27

The amount contributed towards covering the fixed costs from every unit sold

Question 28

Risks associated with manufacturing environment

Answer 28

• production risks
• safety risks
• fraud, theft, and error risks
• environmental risks

Question 29

What are production risks

Answer 29

Risks that are associated with efficiency of production process and quality of products manufactured. They are vital to control as inefficient and wasteful production is costly. (eg. delays, stoppages, or bottlenecks in production line, shortages of raw materials, contaminations within production process, faulty machinery, production of too many defective products, excess waste)

Question 30

What are safety risks

Answer 30

Risks associated with safety and well-being of employees working in manufacturing process, as well as protection of factory, machinery and products. It is not only an ethical responsibility, but there are financial implications involved with injured or ill employees due to lack of health and safety precautions. Manufacturers could be fined or barred from operating if safety measures are inadequate, and damage to factory, machinery, and products due to a preventable disaster (eg. fire) could be costly

Question 31

What are fraud, theft, and error risks?

Answer 31

Due to the large number of employees, materials, and products involved in the production process, the manufacturing environment is very difficult to control and is exposed to risks and opportunities for fraudulent behaviour. To protect against this, manufacturers need to implement tight operational controls, employ physical safeguards, and maintain accurate and detailed records of resources used. (eg. pilfering of raw materials, theft of finished products, fraud schemes, production errors, costing mistakes, unnecessary wastage)

Question 32

What are environmental risks?

Answer 32

Risks associated with harmful impacts that the manufacturing process could have on the environment. There is an ethical and moral responsibility and financial implications to guard against this. They may be charged with fines, be prosecuted, or be publicly exposed, ruining their reputation. (eg. various forms of pollution and depletion of scarce resources)

Question 33

Internal control measures relating to manufacturing

Answer 33

• proper authorisation is required before raw materials can be issued from storage into production
• accurate records of raw materials issued to production are maintained
• sufficient quantities of raw materials are kept on hand, so as to prevent stoppages in production due to raw material shortages
• quality of raw materials is thoroughly checked before entering production
• quality tests are performed at each stage of the production process

Question 34

Internal audit of manufacturing enterprise

Answer 34

• performing fieldwork to investigate the measures taken to control risks and assess whether risks are being adequately managed and controlled
• reporting to management on the adequacy of risk management and internal control systems of manufacturing enterprise and providing recommendations for improvement
• establishing follow-up process to monitor any corrective action taken by management