Cost Units, Cost Classification & Profit Reporting

Question 1

Cost unit

Answer 1

A unit of product/service to which costs can be related

Question 2

Does cost unit always a single item?

Answer 2

No !! - it can be in batches/room/night

Question 3

Composite cost units

Answer 3

Cost units that are made up of two-part

Etc : patient per night cost

Question 4

Purpose of knowing cost production of a cost unit

Answer 4

○ Start selling price
○ Decision making
○ Planning & budgeting
○ Control of resources & cost of production
○ Reporting results

Question 5

Cost classification

Answer 5

Grouping of costs under common characteristics

Question 6

Cost divided by nature

Answer 6

• Material
• Labour
• Expense

Question 7

Cost divided by function

Answer 7

• Production/manufacturing
• Distribution & selling
• Marketing
• R&D
• Administration
• Finance

Question 8

Cost divided by traceability

Answer 8

• Direct
• Indirect

Question 9

Cost divided by responsibility

Answer 9

• Revenue centre
• Cost centre
• Investment centre
• Profit centre

Question 10

Cost divided by behaviour

Answer 10

• Fixed
• Variable
• Mixed
• Step-up

Question 11

Sum of direct costs is known as ??

Answer 11

Prime cost

Question 12

Is non-production overhead included in calculation of production cost/ inventory valuation ??

Answer 12

NO - we only include non production overhead when calculating selling price

Question 13

Cost behaviour

Answer 13

The way costs change as the level of activity changes

Question 14

Level of activity

Answer 14

Amount of work done / Volume of production

Question 15

Basic principle of cost behaviour

Answer 15

As the level of activity rises, costs will usually rise

Question 16

Variable cost

Answer 16

○ Vary in total directly with the volume of output
○ Cost per unit is the same

Question 17

Does all direct cost a variable cost

Answer 17

No - it is possible for a direct cost to be a fixed cost

———————————————–Variable cost –> cost/unit same

Let’s say :

We bought goods and bulk discount is given. Cost/unit before the discount and after the discount is not the same

∴ Direct cost but not variable

Question 18

Fixed cost

Answer 18

Unaffected in total by increase or decrease in volume of output

• A period charge/ Relate to a span of time

Question 19

Period cost

Answer 19

As time span increases, fixed costs will increase

Question 20

Fixed cost per unit

Answer 20

Decrease as more units are produced

Question 21

Stepped-fixed cost

Answer 21

Cost which are fixed in nature within certain levels of activity

Question 22

Mixed costs / Semi-variable / Semi-fixed

Answer 22

Partly fixed & partly variable

Only partly affected by changes in activity level

Question 23

Absorption costing

Answer 23

Cost of product for inventory valuation is variable production cost + fixed production cost

Question 24

Marginal costing

Answer 24

Cost of product for inventory valuation is the variable production cost only

———————————————– Fixed cost is treated as period cost

Question 25

Why profit under AC & MC differ ?

Answer 25

Changes in closing inventory level

Question 26

Contribution

Answer 26

Sales - all variable/marginal cost

!! Sold !! NOT production ✖✖

Question 27

Contribution per unit formula

Answer 27

Selling price - variable cost/unit

Question 28

Total contribution formula

Answer 28

(Contribution/unit) × (Number of units SOLD)

Question 29

In the long term, no difference between MC profit & AC profit

Answer 29

Any differences depends on whether inventory levels are rising / falling

Question 30

Absorption costing or marginal costing better ?

Answer 30

Both are widely used for costing purpose but marginal costing helps in decision making as it higlights contribution - ‘contribution towards fixed cost & profit’