Costing

Question 1

What is a cost ?

Answer 1

It is an expenditure incurred or charged on a specific thing or activity. There are a number of costs involved in the production process.

Question 2

What is direct cost ?

Answer 2

These are the cost that are directly involved in the creation of the product or service.
for example: direct wages, direct materials, direct expenses.

Question 3

What is direct wages ?

Answer 3

These are wages and salaries paid to individuals/ workers who are directly involved in the creation of the good. For example: The baker’s salary who makes the bread.

Question 4

What is direct materials ?

Answer 4

These are all the raw materials/components/items that are used in the production of the good. For example: the flour that is used to produce the bread.

Question 5

What is direct expenses?

Answer 5

These are expenses that occur in the production process of the good. For example: rental of a machine to use to produce the product.

Question 6

What is indirect cost ?

Answer 6

These are cost that are not directly involved in the production of the product. For example: indirect expeneses, materials,wages.

Question 7

What is indirect materials?

Answer 7

These are the materials that make production possible but are not involved in the production of the product. For example: cleaning materials

Question 8

What is indirect wages?

Answer 8

These are the payment of wages and salaries to those who are not involved in the creation of the good. for example: factory surpervisor salaries.

Question 9

What is indirect expenses?

Answer 9

These are costs that are incurred by the factory but are not involve in production. for example: rent or insurance.

Question 10

What are variable costs?

Answer 10

These are cost that directly varies with the level of output. If output increases these cost usually increases. For example: material costs,delivery cost, wages.

Question 11

What is fixed cost?

Answer 11

These are costs that don not vary with the level of output. They remain contant and do not vary whether the firm produces or not. FOR EXAMPLE: rent and insurance

Question 12

What is semi-cost?

Answer 12

These are cost that are both fixed and variable cost.

Question 13

What is marginal costing?

Answer 13

This is a costing system looks at charging variable costs of the production cost.Fixed costs are incoporated in the drafting of the profit and loss statement. These costs are written cost in the period in which it has occurred. Marginal costing principle deals with only variable costs.

Question 14

What is the formula for calculating contribution per unti cost?

Answer 14

selling per unit - variable per unit

Question 15

What is the formula for calculating contribution cost?

Answer 15

Sales- variable costs

Question 16

What is involved in the marginal costing format?

Answer 16

Sales
variables costs: DM,DL,DE
(LESS) closing stock
Contribution
(LESS) fixed costs
Operating Profit

Question 17

What is absorption costing ?

Answer 17

It is an accounting costing system that uses both fixed and variable costs to arrive at production cost. It is what is refered to as full cost because of the use of both fixed and variable cost. And each unit of stock would be charged on this cost.

Question 18

What is included in the absorption costing format?

Answer 18

Sales
variables cost : DM,DL,DE
Fixed cost
Gross profit
Less: expenses or overheads
Net profit

Question 19

Define to term ‘Breakeven analysis’

Answer 19

This is an assessment of the connection that exist among cost,volume and profit of different level of output. This tool is important as it assist in the planning and decision making process.

Question 20

Breakeven analysis is useful for?

Answer 20

1.Determines how changes in cost and efficiency affect profits.
2. Makes predictions on the effects of price changes on sales.
3.Examines the relationship between variable and fixed costs.
4. Determine the Breakeven point.

Question 21

What are advantages of Breakeven?

Answer 21

1.Its calculation is fairly simple
2.highlights the profit or loss at different levels of output
3.shows how a firms profit or loss can be affect due to change in price or cost.

Question 22

The disadvantages of Breakeven

Answer 22

1. Breakeven chart is time consuming.
2. A number of business produce multiple products at varying costs and prices.
   3.The effectiveness of Breakeven analysis is determine by the accuracy of the data.

Question 23

Breakeven analysis formula

Answer 23

•Breakeven point in units:
Fixed costs/Contribution per unit
•Breakeven point in sales:
Fixed costs/contribution to sales ratio

Contribution sales ratio
Contribution per unit/ X 100
selling price

•level of sales to result in target profit
(Units)
Fixed costs + target profit/
contribution per unit

(Sales)
Fixed costs + target profit/ X SP
contribution per unit

Question 24

Margin of safety

Answer 24

The amount by which sales exceed the Breakeven point. It shows amount by which sales can fall before a firm starts making a loss.

Question 25

Margin of safety formula

Answer 25

Actual sales-Breakeven point

Expressed as a percentage
Margin of safety/ X 100
Expected sales

Question 26

Make or buy decision

Answer 26

To make this decision, the firm must compare the variable cost to manufacture the product against the price it would pay to buy (outsource) the product. Note that only the variable or marginal costs are being compared to price, since the firm would incur its fixed costs whether it makes or buys the product.

1.The cost involved - the firm will be mindful of the difference between the cost to buy and the cost to make and, barring poor quality, this will determine the firm’s decision.

2.The firm may be the only one producing the product.

3.It may want to produce its own brand.

4.The firm may want to ensure that the product is always available instead of depending on an outside supplier.