Definitions

Question 1

Business Organisation

Answer 1

An individual or group working together to achieve common business goals.
Examples are sole traders, partnerships, companies, and not-for-profit organisations

Question 2

Management Information

Answer 2

Information used by managers to help organisations achieve their goals.
Financial (for example, numbers relating to sales or costs)
Non-financial (for example, customer reviews about a product or social trends that might affect sales).

Question 3

Planning

Answer 3

Managers plan a course of action for the future.
Setting objectives, such as a sales target for a product
Selecting the best method of achieving the objectives.
Plans can be financial, like a budget

Question 4

Control

Answer 4

Managers use information to check how the organisation performs compared to their plans.
Comparing actual results with planned results (variance)
Reviewing strategic plans when circumstances change.

Question 5

Decision-making

Answer 5

Managers use information to help them make decisions about the organisation:

Preparing information for investment decisions (such as whether to invest in new plant and equipment)
Making decisions on actions to take: how much of the product to make, what price to set, how to reduce costs etc.

Question 6

Accurate

Answer 6

Information provided to managers should be free from significant errors.

Question 7

Complete

Answer 7

info should include all relevant information

Question 8

Cost-effective

Answer 8

The financial benefits or value of the information must outweigh the costs of obtaining that information

Question 9

User-targeted

Answer 9

Info should be tailored to meet the needs of the recipient

Question 10

Relevant

Answer 10

Only information directly related to the decision being considered should be provided

Question 11

Authoritative

Answer 11

the source of info should be reputable and reliable

Question 12

Timely

Answer 12

in time to influence a decision

Question 13

Easy to use

Answer 13

should be concise, presented clearly, communicated using an appropriate communication channel

Question 14

Bookkeeping

Answer 14

Recording financial transactions

Question 15

Management accounting

Answer 15

provision of information to managers to operate efficient and effectively

Question 16

financial accounting

Answer 16

recording, analysing and reporting the organisation’s financial transactions

Question 17

Accounting system

Answer 17

system used to initiate, gather, process, store and analyse accounting data

Question 18

files

Answer 18

data files are collections of records with similar characteristics eg. the general ledger, receivables ledger, payables ledger

Question 19

Records

Answer 19

a record in a file consists of data relating to one unit of information. a record consists of several fields. For example, a supplier account in the payables ledger

Question 20

Fields

Answer 20

a field is an item of data relating to a record

eg. a supplier record includes separate fields for their account number, name and credit limit

Question 21

Key fields

Answer 21

Each record in a file includes a key field - an item of data used to identify it. eg. this might be a unique supplier code

Question 22

Transaction files

Answer 22

a transaction file contains records related to individual transactions, such as invoices

Question 23

master files

Answer 23

contains ‘standing’ or reference data (such as supplier names, and addresses) and cumulative transaction data (such as year-to-date figures)

Question 24

accounting software packages

Answer 24

All computerised accounting software packages have several functions and features:
- Enforces accountancy rules
- Separate modules
- Real-time processing
- Links between modules
- Automates period-end routines
- Queries and reporting

Question 25

Advantages of Computerised Systems

Answer 25

Speed and efficiency
- accuracy
- availability
- easier to produce reports
- up to date information

Question 26

Data input

Answer 26

typed entries
- barcode readers
- online banking
- smart cards
- mobile devices

Question 27

Data storage and processing

Answer 27

servers
- portable data storage - external memory devices eg. memory sticks

Question 28

Data output

Answer 28

• Reports
• dashboard
• remote access

Question 29

Role of the trainee accountant

Answer 29

Trainee accountants often work within an organisation’s finance function or accounting department while studying with a professional accountancy body (such as ACCA).
Ideally, a trainee accountant will be involved in various tasks, including routine processing and higher-level analysis, providing them with a rounded experience to help them progress in their careers.

Question 30

Responsibility accounting

Answer 30

Accounting method for costs according to the manager responsible for those costs.

Question 31

Responsibility Centre

Answer 31

An activity or area of responsibility in an organisation a manager is responsible for and has control over.

Question 32

Controllable cost

Answer 32

a cost that is within control of a manager

Question 33

Uncontrollable cost

Answer 33

a cost that is beyond the control of a manager

Question 34

Cost centre

Answer 34

An activity or area of responsibility in an organisation that generates costs but is not responsible for generating revenue or producing direct profit.

can be a
- function (or department)
- activity eg. storekeeping
- project
- person
- process
- production or service location
- equipment or machinery

Question 35

Profit Centre

Answer 35

An activity or area of responsibility in an organisation to which costs and revenue can be attributed.

Identifying profit centres allows profitability to be measured as a product of costs and revenues, which is impossible for a cost centre.

key features of profit centres:
- organisational hierarchy
- the seniority of profit centre managers
- External and internal revenue
- from cost centre to profit centre

Question 36

INVESTMENT centre

Answer 36

An activity or area of responsibility in an organisation to which costs and revenue can be attributed and capital deployment.

The distinguishing feature of an investment centre is that its manager is also responsible for making investment decisions regarding the assets available for use (asset investment), such as the purchase and sale of non-current (long-term) assets.

Question 37

Business unit

Answer 37

A particular activity or area of responsibility in an organisation that has a degree of autonomy in deciding plans and processes for generating profits.

Question 38

Responsibility Centre structure

Answer 38

1. investment centre
2. profit centre
3. cost centre

Question 39

COST

Answer 39

The amount paid to buy or make something.

Question 40

COSTING

Answer 40

Method of understanding the costs of an item.

Question 41

COST UNIT

Answer 41

A unit of product or service with which costs are associated.

Cost unit information used to
- determine a selling price
- decide what to produce
- help with cost control
- to plan and budget

Question 42

BUDGET

Answer 42

A plan expressed in monetary or quantity terms.

Question 43

Cost categories

Answer 43

• Function
• Responsibility
• Behaviour
• Type
• Traceability

Question 44

Responsibility accounting

Answer 44

– accounting method for costs according to the manager responsible for those costs.

Question 45

Responsibility centre

Answer 45

an activity or area of responsibility in an organisation a manager is responsible for and has control over.

Question 46

Controllable cost

Answer 46

a cost that is within the control of a manger

Question 47

Uncontrollable cost

Answer 47

a cost that is beyond the control of a manager

Question 48

Cost centre

Answer 48

an activity or area of responsibility in an organisation that generates costs but is not responsible for generating revenue or producing direct profit.

Question 49

Revenue centre

Answer 49

an activity or area of responsibility in an organisation that generates revenue. May also be responsible for directly attributable selling costs.

Question 50

Profit centre

Answer 50

an activity or area of an organisation responsible for costs and revenue.

Question 51

Investment centre

Answer 51

an activity or area of an organisation responsible for costs, revenue, and capital investment.

Question 52

Function

Answer 52

• Production - costs incurred in the production of goods and services

Non-production - other costs not attributable to production of goods and services

Question 53

Cost behaviour

Answer 53

The changes in cost according to the level of activity

Question 54

Variable costs

Answer 54

Costs that change according to the level of activity

Question 55

fixed costs

Answer 55

costs that remain constant despite changes in activity level

Question 56

Mixed costs

Answer 56

Costs that have both variable

Question 57

Stepped fixed costs

Answer 57

Costs that remain constant for a range of activity, will increase to a higher constant for a higher range of activity

Question 58

Direct costs

Answer 58

Costs that can be measured reliably and directly traced to a specific cost unit.
all other costs are indirect costs

Question 59

Prime costs

Answer 59

The total sum of direct costs, also known as the total direct cost

Question 60

Indirect costs

Answer 60

Costs that are not directly traceable to a cost unit; also known as overheads

Question 61

Cost card

Answer 61

A record of the costs associated with producing and selling a single product or service

producing a cost card:
1. allocate direct costs to cost unit
2. including indirect production and non-production costs
3. Calculate overhead cost per unit
4. Calculate the total cost per unit

Question 62

Absorption costing

Answer 62

Values production at full inventory cost, inc fixed production overheads

Question 63

Marginal costing

Answer 63

Values production at marginal (variable) production costs

Question 64

Job costing

Answer 64

Cost jobs that have unique criteria

Question 65

Batch costing

Answer 65

Costs batches, which have homogenous units in each batch

Question 66

Process costing

Answer 66

Costs units produced from a continuous process

Question 67

An accounting system

Answer 67

1. Sales - The sales system captures sales details from orders received and provides information to pick goods, deliver them, and issue customer invoices.
2. Purchases - The purchases system enables employers to requisition and authorise purchases and monitor payables to ensure payments are made on time and discounts are fully utilised.
3. Labour - The labour system enables employees to record their work, linking directly with payroll to calculate earned gross pay and necessary deductions automatically. Deductions and employer contributions are posted to the ledgers directly.
   Payroll is authorised electronically, and payment orders automatically sent to finance for payment.
4. Cash/Bank - The cash system may automatically link up with the entity’s bank or finance provider to have a real-time overview of available cash balances and sources of finance. Payments may be authorised digitally via authorisation tokens or transaction codes

Question 68

Purchase requisition (internal request for purchase to be initiated)

Answer 68

When a person (or an automated system) within an organisation identifies the need to purchase materials, goods or services, a purchase requisition must be completed.
Its primary purpose is to control the purchases made by the organisation, ensuring that only authorised purchases are made.

info needed on it:
- purchase requisition number
- inventory code
- details of goods or services required
- usual supplier
- requested by
- approved by
- budget code

Question 69

Purchase order (sent digitally to external supplier)

Answer 69

Once a supplier has been selected – usually by considering a combination of price, service and quality – the person responsible for purchasing then prepares and sends a purchase order (PO) to the supplier, formally ordering the goods or service.
Procedures may differ across organisations, but generally, the PO is created in the system and internal access to it is made available to:
1. The accounts department (to compare with the invoice when it arrives)
2. The person who initially raised the purchase requisition (so they know their request has been actioned)
3. The storekeeper who is responsible for the inventory held in the stores or warehouse (if the PO is for materials used in production)
4. The purchasing department (responsible for buying and making purchases)

Question 70

Information included in a purchase order

Answer 70

• purchase order nummber
• address
• product or service required
• quantity
• price
• supplier product code
• electronic authorisation

Question 71

Goods received

Answer 71

• check against record of goods received
• apply general ledger codes and debit relevant accounts
• check sales tax rate
• deduct relevant discounts
• check total amount
• make payment

Question 72

Types of labour costs

Answer 72

labour costs are the costs incurred to pay the workforce for the work performed.
They include:
- wages (paid periodically)
- salaries
- overtime payments
- bonuses
- sick pay
- holiday pay
other incentives

Question 73

Info in a payslip

Answer 73

• identification
• tax codes
• other contributions
• gross pay
• deductions
• year-to-date figures
• net pay

Question 74

Employee records

Answer 74

• employee payroll record
• employee attendance record
• employee swipe cards
• employee timesheets
• job cards

Question 75

Code

Answer 75

unique set of characters used to identify an item, consisting of numbers, letters, or other symbols

Question 76

Coding system

Answer 76

system by which codes are created, managed, used

• logical
• concise
• consistent
• unique
• expandable

Question 77

Chart of accounts

Answer 77

A document that contains comprehensive details on the classes of codes and the accounts and items they identify.

The coding system used by an organisation is often determined by the computerised accounting software package, which may come with a ready-made chart of accounts and suggested codes.
Five different coding systems are examined:
Sequential
Block
Faceted
Hierarchical
Mnemonic

Question 78

Sequential

Answer 78

Sequential (or progressive) coding systems allocate a standard numeric code to each item in a sequence.

Question 79

Block (or group classification)

Answer 79

Block (or group classification) coding systems group similar items together in a block. This system is often applied to the chart of accounts in an accounting system.

can accommodate 999 items within each category

Question 80

Faceted

Answer 80

A faceted code is broken down into facets (or groups), each representing a different characteristic.

eg. 02 DM 0070

Question 81

Hierarchical

Answer 81

A hierarchical coding system is like a faceted system because each code is broken down into facets; the difference is that each facet is a sub-category that represents a subset of the previous category. The code grows in length as more detail is provided.

Question 82

Mnemonic

Answer 82

eg. LAX

Question 83

Items classified using codes include:

Answer 83

• Customers
• Suppliers
• General ledger accounts
• Products
• Cost centres
• Employees
• Jobs
• Materials

Question 84

CH3: COST BEHAVIOUR
Fixed cost

Answer 84

A cost that remains the same irrespective of the output level

Question 85

Variable cost

Answer 85

A cost that changes in direct proportion to the output level.
(increases as output increases)

Question 86

Mixed (semi-fixed) costs

Answer 86

A mixed cost has both variable and fixed costs. It is also known as semi-variable or semi-fixed cost.

Question 87

Stepped Fixed Costs

Answer 87

A stepped-fixed cost is fixed within a range of output (activity) and increases to a higher fixed constant when that range is exceeded.

Question 88

The High-Low Method

Answer 88

method to separate semi-variable costs with fixed and variable methods

• and predict how these costs will behave at different activity levels

Question 89

Limitations of high low method

Answer 89

The high-low method provides a quick way of getting an approximate cost when you do not have access to more detailed information. There are some limitations to the approach:
- The high-low method only estimates the costs: the actual costs might differ.
- We also must assume that each unit of material costs the same, whereas, in reality, the supplier might offer a discount for large volumes.
- If possible, the costs should be analysed based on quotes from the supplier, which show the fixed and variable amounts, so that the figures you use are more accurate.
- The high-low method uses the most extreme figures observed, which may not be typical of how most production costs behave.
- Making projections using high-low or any method using historical information assumes that the cost rates in the future will be the same as they were in the past. Inflation, technological improvements and many other factors may make this untrue.

Question 90

Fixed costs into stepped-fixed costs

Answer 90

Over the long term, with a wide range of activity, fixed costs may behave as stepped fixed costs

eg. rent in the short term would behave as a fixed cost, as shown on the total cost graph below

Question 91

Stepped-fixed costs into variable costs

Answer 91

The various steps in fixed costs may be likened to a variable cost in the long term.
In this example, as output increases in the long term, so does rent cost, exhibiting variable behaviour

Question 92

CAPPED CHARGES

Answer 92

There is a maximum limit on the cost incurred

eg. maximum day rate (cost plateaus)

Question 93

Minimum charge

Answer 93

The minimum cost that must be incurred. cost will remain constant until threshold activity is reached, after which it behaves as a variable cost
eg. taxi fare

Question 94

Volume discount

Answer 94

A discount is given upon reaching a certain activity threshold (units purchased), reducing the cost per unit on all units purchased. the discount will also apply to any additional units purchased

Question 95

Labour Overtime

Answer 95

When labour is scarce, employees may be required to work additional hours. These extra hours may be paid at a higher rate.

Question 96

Ch4 - budgets and variances
Budget – A financial plan; that shows income and costs for a period.

Answer 96

Budgets let us:
Communicate the activities of the organisation
Coordinate the plans of the organisation
Control the performance of the organisation.

Question 97

Creating a Budget

Answer 97

Budgeting relies on the principle budget factor - element that limits the activities of the organisation

Several different budgets:
- sales
- production
- cash

Collate costs (cost card), then create a budget

Question 98

Forecast

Answer 98

An estimate of future performance, usually created referring to actual results for the period.

Whereas a budget is a financial plan, a forecast predicts the future. It is the expected financial results for a future period

• further a prediction is into the future, less reliable

Question 99

Flexible Budget

Answer 99

A budget that can change to reflect multiple activity levels.
A flexible budget can be adjusted for factors where the actual outcome differs from what was initially expected.
For example, if sales volume is higher than expected, the costs contained within the budget that would be expected to vary with sales volume would be updated.

Question 100

Comparisons - managers compare sets of information to put that information into context

Answer 100

Comparisons can be:
- Financial - such as a comparison of budgeted costs versus actual costs (what the organisation thought it would spend versus what it spent)

• Non-financial - such as comparing customer awareness of two brands (is the T-Shirt Co brand more famous than the Gucci brand?)

Comparator:
- Budget
- Forecast
- previous periods
- corresponding period

Question 101

Variance

Answer 101

A difference between budgeted and actual results

Question 102

Flexing budgets

Answer 102

If the actual and budgeted activity level (output) is different, it is not meaningful to directly compare actual results to the budget.
The budget may be flexed to actual activity levels to make the comparison more meaningful. This would mean adjusting costs that change with activity level.

• cost card can be used to recalculate the budget based on actual activity level

Question 103

Recalculate the budget

Answer 103

Multiply the cost card figures by the number of units produced to flex the budget. The overheads are fixed, so they do not change when activity levels change

Question 104

Compare flexed budget to actual results

Answer 104

Direct materials and direct expenses have favourable variances – they were cheaper than expected. All the other costs were more expensive than expected in the budget, but the flexed budget variance is much lower than the unflexed budget.

Question 105

Comparing budget data with actual data

If the actual is less than budget

Answer 105

For sales revenue, this is an adverse variance: the business has earned less money

For costs, this is a favourable variance: the business has had to pay less.

Question 106

Impact of favourable and adverse variances

Answer 106

Variances let managers know that things are not going according to plan.
Adverse variances should be investigated,
and favourable variances are not always beneficial for the organisation.

Question 107

Exception reporting

Answer 107

ensures that managers only get the information they need to act on by reporting the significant variances

Question 108

Controllable and non-controllable variables

Answer 108

factors beyond the manager’s control cause non-controllable variances.

investigating variances:
- When the variance is significant (exceeds the threshold %)
- When the variance is controllable
- When the variance investigation is cost-beneficial – in other words, it would not cost more to investigate than the cost implications of the variance

Question 109

Planning and control cycle

Answer 109

Set goals
Set objectives and action plans
Budget
Implement
Monitor
Review and Forecast

Question 110

Feedback control

Answer 110

Managers compare actual results with relevant control data, analyse the variances and act to bring future results into line with the plan. Feedback action occurs after something has gone wrong, and variance has already happened. Most budgetary systems provide feedback.

An example of feedback control is comparing actual to budget and resolving issues that have already affected past performance and will affect future performance.

Question 111

Feedforward Control

Answer 111

Budget figures could be compared with a forecast. This is useful because it lets managers know where expected future variances will likely occur. This allows them to act to prevent an adverse variance in the future or at least alert management to the need to be ready to explain adverse variances by the period-end. This type of control, which helps prevent future problems, is known as feedforward control.

An example of feedforward control is comparing budget to forecast and resolving issues that will happen in the future and affect future performance.

Question 112

DATA

Answer 112

Raw, unprocessed facts, figures, characters, or words

Question 113

INFORMATION

Answer 113

Data that has been processed to have meaning.

Question 114

Communicating management information in the company is vital for two reasons. First, everyone needs to know what’s going on and who’s making decisions; second, to make robust decisions.

Question 115

Methods of communication

Answer 115

Visual

written

Oral

Question 116

Considerations when communicating

Answer 116

• recipient
• timeliness
• complexity [Complex information may be more easily absorbed in a written document such as a report, email or letter. However, it might be better first to introduce it in a face-to-face meeting or telephone conversation to answer questions and correct misunderstandings.]
• confidentiality
• Evidence - is proof of communication required?
• how to ensure the retention of appropriate evidence?
• ## cost

Question 117

Emails
- CC and BC

• Signature [role, disclaimers]

Answer 117

CC and BCC
In addition to the recipient, emails may be distributed via CC (carbon copy) and BCC (blind carbon copy).

To BCC someone is the send a copy of the email to that person, who is not the intended recipient, but should be kept in the know, without the knowledge of the intended and CC’d recipients.
BCC recipients know to whom the email has been sent and CC’d; the intended and CC’d recipients will not be aware the email has been sent to BCC recipients.

Question 118

Memorandums (Memos)

Answer 118

Memorandums are concise formal statements issued to communicate something important to the intended recipient. They may be public or confidential.
Memos are usually written in plain English, with efforts to reduce jargon and clearly state their contents and next course of action.
The elements of a memo are like a report.

Question 119

reports - can be standard or ad hoc

Answer 119

elements
- distribution list and date
- introduction
- sections
- summary

When writing a report, consider if any information can be presented in these ways to help non-financial managers understand the information more easily.

Question 120

Line chart

Answer 120

useful for showing trends over time, such as sales and revenue growth

Question 121

bar chart

Answer 121

bar charts show comparisons. eg. comparing budget expectations against actual results

Question 122

pie chart

Answer 122

pie charts can show a relative comparison to a whole, such as sales in different regions

Question 123

scatter diagram

Answer 123

show results over two axes, which helps identify correlations and trends

Question 124

table

Answer 124

show precise numerical data, such as financial statements

Question 125

Effective charts - chart title, axis title, legend (key), gridlines

Answer 125

wrong chart type will be misleading and may lead to dysfunctional decision-making eg. the use of a line to connect the data points suggests change over time

Question 126

Ch6
Materials are classified in 4 main ways:

Answer 126

RAW MATERIALS - goods purchased to be made into products for sale

BOUGHT-IN COMPONENTS - parts purchased from an external supplier for assembly

WORK IN PROGRESS (wip) - products partly made but unfinished

FINISHED GOODS - products ready for sale

Question 127

Direct materials - materials directly attributable to a production unit.
Raw materials are direct materials: for example, cotton cloth can be seen in a specific t-shirt

Answer 127

Indirect materials - not directly attributable to a production unit.

Question 128

economies of ordering

Answer 128

suppliers often offer discounts on large orders of materials, reducing purchasing costs

Question 129

purchasing process

1. request for materials - stores dept request materials using authorised purchase requisition
2. find supplier - purchasing department source suitable supplier
3. order goods - PURCHASE ORDER
4. receive goods - warehouse record goods received
5. pay for goods - finance team would check the invoice against purchase order and delivery note and process payment for materials

Answer 129

accounting entries for materials - materials control account
- purchases - materials control
- issues to production (direct) - work in progress
- issues to production (indirect) - production overhead
- returns from production - materials control
- returns to supplier - payables

Question 130

Calculating Material requirements -> material for product and waste accounting for -> MATERIAL INPUT REQUIREMENT

Answer 130

material input requirement = output material + expected waste

Question 131

controlling wastage

Answer 131

Managers measure wastage in several ways:
- Monitoring actual input wastage: This is the figure calculated earlier. It is the amount of material wasted in producing a finished product.
- Monitoring output wastage: This is the number of items rejected because they are not up to standard, usually represented as a percentage of the total number of products made.
- Monitoring rework: This is the number of items requiring corrections, usually represented as a percentage of the total number of products made.

If it is identified that wastage is avoidable, managers will need to take steps to reduce the wastage. For example, they might:
- Arrange training to ensure that workers are operating correctly and efficiently
- Review the quality of the materials being purchased
- Replace old equipment.

Question 132

There are several different methods of calculating inventory value:
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Cumulative weighted average pricing (CWA)
Periodic weighted average pricing (PWA)

Answer 132

FIFO assumes that the inventory purchased first is sold first. So, the materials in stock at the end of a period are valued using the most recent prices paid to suppliers.

LIFO assumes that the inventory purchased last is sold. So, the materials in stock at the end of a period are valued using the oldest unit prices paid to suppliers.

Question 133

cumulative weighted average approach calculates the average cost per unit every time a new material receipt occurs by dividing the total cost of held inventory by the total number of units in stock. This price is used to value all issues to production until another delivery is received. The closing inventory is valued using the most recently calculated weighted average price.

Answer 133

periodic weighted average calculates a single weighted average cost per unit at the end of each accounting period (rather than whenever inventory is purchased). This single weighted average price is used to value all the issues to production and the closing inventory for the period.

Question 134

Ordering ‘just in time’ reduces inventory holding costs.

Production should only make as many units as can be sold. There will be no inventory of raw materials or finished goods.
However, this increases the risk of “stock-out”, where no inventory is available for production or sales.
To mitigate this risk, companies build robust, integrated relationships with their suppliers or diversify their sources of supply.

Answer 134

Buffer inventory - common to hold some reserve inventory to accommodate variable demand or delays in receiving raw materials. buffer inv also held it cheaper to buy in large quantities, as suppliers often give discounts for bulk purchases

Question 135

COST OF SALES (CoS) affects profit calculations and is also known as the cost of goods sold (CoGS)

Answer 135

Sales (Revenue) - Cost of sales = gross profit

opening inventories + purchases or costs of production - closing inventories = cost of sales

Question 136

COST OF PRODUCTION - cost of making the products

Answer 136

Cost of production = direct production costs + Production overheads

[[assuming absorption costing]]

Question 137

FIFO - Advantages
- Used in statutory accounts (IAS2)
- reflects actual practice. the first items purchased will probably be the first items used in the produciton process
- easy to understand and explain
- closing investor value based on most recently purchased items, so will be close to the cost of replacing the inventory

Answer 137

• Disadvantages
• awkward to administer as each set of items purchased needs to be identified separately
• managers are charged varying prices for same materials at different time - comparisons difficult

Question 138

LIFO - Advantages
- issue price clost to the current market value as the last items purchased are assumed to be the ones used first

Answer 138

Disadv
- arkward to administer as each consignment needs to be identified separately
- does not reflect actual practice - more likely that the first items purchased will be used first in production process
- managers are charged different prices for same materials at different times

Question 139

Weighted average - adv
- easy to administer as each consignment of purchases does not need to be identified separately
- using weighted average pricing means that price fluctuations are smoothed out, making it easier for managers to use the information

Answer 139

Disadv
- issue price will not be actual price that has been paid

Question 140

INFLATION - sustained increase in the price of goods and services over time.

Answer 140

increased price of raw materials:
FIFO - closing inv valued at a cost close to the current market value

LIFO - issues materials at a cost close to the current market value. Closing inventories are valued at a cost lower than the current market value

CWA - time delay between the issue cost and current market value. values closing inv at cost that rises with inflation, but there is a time delay between the issue cost and current market value

PWA - issues materials at a cost LOWER than the current market value. Values closing inventories at a cost lower than current market value

Question 141

Inventory costs
- Purchase cost - price paid for inventory. inc taxes
- Ordering cost - costs for ordering inventory. includes transport and administration costs

Answer 141

• Holding cost - costs incurred for holding inventory eg. storage, finance costs, insurance, obsolescence, deterioration, spoilage, theft
• Stockout cost - costs incurred if inventory is unavailable. inc. price

Question 142

OBSOLESCENCE

Answer 142

Reduction in inventory value due to it becoming irrelevant to the organisations needs
eg. tech products surpassed by new tech and lowers in value

Question 143

DETERIORATION

Answer 143

Reduction in inventory value due to degradation in its qualities. eg. fresh produce

Obsolete or deteriorating inventory eventually discarded and written off

Question 144

Managing Inventory Costs
- order size -buying in bulk
Stockout costs:
- If it maintains too little inventory, there is a risk of running out, known as a stockout.
Stockout costs include:
Loss of sales during the stockout period
Loss of reputation
Customers switching to competitor products and continuing to buy from competitors in the future
Cost of production stoppages (machinery and workers are idle)
Extra ordering costs for urgent orders.

Answer 144

Balancing Inventory costs:
Holding the right amount of inventory
Valuing inventory issued and remaining
Ordering goods
Receiving and storing goods.

Question 145

inventory control levels - lead time and how much to order

Answer 145

Lead time - the waiting time to receive goods after placing an order

Question 146

Reorder level calculation

Answer 146

= maximum usage x Maximum lead time

Question 147

Minimum level calc

Answer 147

= Reorder level - (average usage x average lead time)

Question 148

Maximum level calc

Answer 148

= Reorder level + reorder quantity - (minimum usage x Minimum lead time)

Question 149

Average level calc

Answer 149

= Minimum level + reorder quantity / 2

Question 150

Economic order quantity (EOQ) -> order quantity where holding costs and ordering costs are equal, assuming no buffer inventory

assumptions
- holding cost per unit is constant
- average inventory is held = minimum or buffer inventory + (reorder quantity / 2)

Answer 150

EOQ = square root of (2 x cost of ordering from supplier x demand during period) divided by cost of holding one unit of inventory for one time period

Question 151

Two methods of stocktaking:
- Period: materials in inventory are counted once a year
- Continuous: Materials are checked regularly throughout the year (this method less disruptive for organisations and more accurate)

Question 152

Inventory discrepancies (compared to records)

Answer 152

• quantity of goods delivered differs from quantity recorded as being received -> all inventory should be counted as received and signed off
• actual quantity of inventory issued to production differs from that shown in the records -> inventory issued to production should be carefully counted and signed off
• production returned excess inventory without any documentation -> all movements of inventory should be recorded
• theft of inventory by employees -> security mechanisms and regular inventory checks will prevent this
• inventory damaged or obsolete and thrown away without being documented -> damaged or obsolete items should be recorded

Question 153

Storing goods - system for keeping inventory accessible and secure:

Answer 153

• frequency of use and location in the warehouse
• dangerous items and chemicals
• special needs such as light, temp, clean air, hygiene
• security for valuable or high risk items

Question 154

labour costs
The employer’s contribution to the employee’s pension
Employee benefits such as company cars and private health insurance
Training costs
Recruitment costs

Answer 154

• DIRECT LABOUR - work directly attributable to producing a product or service
• INDIRECT LABOUR - not directly attributable to production of product or service

Question 155

the basic pay of direct workers is a direct cost, and all other costs of direct workers are indirect costs. All costs of indirect workers are indirect costs.
Only hours spent directly producing a product/service are considered direct labour costs.
All other costs are indirect, even if paid to direct workers.
A bonus paid to direct workers is an example of an indirect cost paid to direct workers.

Answer 155

idle time -> indirect cost

general overtime premium -> indirect cost

overtime worked for customer request -> DIRECT cost

Question 156

• active basic hours of direct workers are direct costs
• idle time of direct workers is an indirect cost
• basic pay earned from overtime hours is a direct cost
• overtime premium of direct workers is an indirect cost

Answer 156

• cost of indirect workers is indirect

Question 157

renumeration for work
methods:
- time-based
- output or performance -based

Answer 157

for exam *assume labour costs are variable unless specified otherwise

Question 158

time-based schemes (renumeration)

• Salary - agreed amount per month
• Wages - waged employees paid based on agreed hourly rate, depending on how many hours they work
• overtime premiums - work longer hours than normal, in addition to standard pay rate

Answer 158

Adv
- time based payments simple to administer
- one standard rate applied to all employees in same role (fairer)

Disadv
- no incentive for employees to be efficient
- everyone paid same regardless of performance
- more supervision needed bc employees not as highly motivated as they are when working under an incentive scheme

Question 159

Incentive type
- Piecework - payment is a fixed amount for each item completed - efficiency
- monetary incentive based on performance
- commission paid based on successful outcome eg. sales

• profit-sharing schemes - employees are given a share of the profit made by the organisation in the year

Answer 159

Adv
- help to increase production while controlling costs per unit, which helps the accuracy of planning
- more efficient employees paid more
- may attract more skilled workers

Disadv
- incentive schemes more expensive to administer
- quality control needed to ensure output meets standards

Question 160

Labour cost records should contain the following:
The identities, roles, and payment information of the employees.
The agreed wages and salaries
The hours worked by employees
The work that has been done.

Answer 160

HR system - primary source of data
Payroll system - info drawn from HR for use within payroll system
Financial accounting system - payroll transactions automatically posted to the financial accounting system - summarised version of payroll system

management information system - access info from all systems. no personal details

Question 161

Paying Wages
Payment of net pay to employees

Answer 161

Dr Wages control
Cr Bank / Cash (net pay)

Question 162

Payment of employee deductions and employer contributions to external entities

Answer 162

Dr Wages control
Cr tax PAYE / employee benefits

[Pay-as-you-earn (PAYE) are monthly deductions from employee paycheques remitted to external entities. PAYE may be required for income tax and mandatory insurance contributions.]

Question 163

Accounting for Labour Costs in Wages Control
Accounting for costs of labour (including employer contributions)

Answer 163

Dr Work-in-progress / production overheads / employer contributions
Cr Wages control

Question 164

Labour costs are then accounted for using the same principles applied to direct and indirect materials costs.
Direct labour costs are debited to the work-in-progress account
Indirect labour costs are debited to the production overhead control account
Both direct and indirect labour costs are credited to the wages control account.

Answer 164

Accounting for direct labour costs associated with PRODUCTION:
Dr Work in progress
Cr Wages control

Question 165

Accounting for Indirect Labour costs

Answer 165

Indirect labour costs would be transferred into a Production overheads account for subsequent absorption into work-in-progress.

Transfer of indirect labour costs to production overheads
Dr Production overheads
Cr Wages control

Question 166

Absorption of Production Overheads
Production overheads (which include all indirect production costs) would be absorbed into production.

Answer 166

Absorption of production overheads into production
Dr Work-in-progress
Cr Production overheads

Question 167

Costs of labour turnover
- Preventative costs (incentives, training)
- Replacement costs - recruiting and hiring (loss of output due to time gap, advertising, training courses, lower production w new staff)

Answer 167

Labour turnover rate = Replacements / av number of employees in period x 100%

Average number of employees = (opening employees + closing employees) / 2

Question 168

employer actions to reduce labour turnover include

Paying higher salaries and offering better benefits
Creating a better working atmosphere
Offering development training
Offering clear career progression
Offering flexible working arrangements.

Answer 168

3 ratios for measuring labour performance:
- efficiency ratio
- capacity utilisation ratio
- production volume ratio

Question 169

capacity utilisation ration
(measures whether total direct labour hours worked were greater or less than budgeted)

Answer 169

= (actual hours worked / hours budgeted) x 100%

ratio of >100% indicates more labour hours were worked than budgeted

Question 170

Production volume ratio (measures how the actual production output for a period (in direct labour hours) compares with the budgeted output)

Answer 170

= (expected hours to make actual output / hours budgeted) x 100%

ratio of >100% indicates higher than budgeted performance

Question 171

Relationship between labour ratios:

Answer 171

efficiency ratio x capacity utilisation ratio = production volume ratio.

(labour ratios are based on direct labour hours)

Question 172

IDLE TIME RATIO -> shows the proportion of available hours lost due to idle time

Answer 172

Idle time ratio = (idle hours / total hours) x 100%

**Pay for idle time is an indirect cost (including direct workers)

Question 173

Expense - decreases in economic benefits during the accounting period in the form of outflows, depletion of assets, or incurrences of liabilities

Answer 173

Expenses result in either:

The decrease in an asset such as cash in the bank account when items are paid for immediately, or
The increase in a liability – such as an account payable or creditor when items are paid for on credit.

Question 174

Classifying expenses by function:

Answer 174

buildings management eg. rent, utility bills

• production department
• selling and distribution
• finance and legal

Question 175

Direct expenses - incurred on a specific product and part of the direct (or prime) cost of the product

Indirect expenses - cannot be attributed to a specific product (overheads)

Answer 175

Direct expenses are recorded by coding them directly to the product, job or client

Indirect expenses are recorded by allocating them to cost centres and apportioning or absorbing them into the areas of the organisation that have used the resource.

Question 176

authorising expense invoices

Answer 176

Invoices usually are stamped so that the person authorising payment must fill in some vital information, including:
Date
Signature
Cost code (for allocation to production unit or function)

Question 177

Asset expenditure - new non-current asset is bought or existing non-current assets are improved

Answer 177

Accounting entry:

Dr Asset [So Financial Position]
Cr Cash/Bank/Payables [So Financial position]

Question 178

Expenses - ongoing costs of running the organisation. expensed in the period revenue is generated from it (matching concept)

Answer 178

Accounting entry:

Dr Expense (Statement of Profit and Loss)
Cr Cash/Bank/Payables (Statement of Financial Position)

Question 179

Expenses reflected in the Statement of Profit or Loss immediately, reducing profit

Asset expenditure does not affect the calculation of profit

Answer 179

If asset expenditure is incorrectly classified as an expense, expenses will be overstated. This means that profit will be understated.

Question 180

Depreciation: way to match expenditure on non-current assets to the period when the assets are used (matching concept)
- expense shown on the statement of profit or loss in the period the asset is used to generate revenue
- non-cash item (no cash is paid when charging depreciation)

Answer 180

The period depreciation is charged should match the asset’s useful life (years used)

Calc depreciation:
- straight line method
- reducing balance method
- machine hour method
- product units method

Question 181

Residual value - value of the asset after the end of its useful life aka scrap value

Answer 181

Depreciable amount is the asset’s value to be deprciated over its useful life:

Depreciable amount = cost of asset - residual value or scrap value

Question 182

Annual depreciation - depreciation charge for the year on the asset

Answer 182

Accumulated Depreciation - total depreciation charged up to a point in the asset’s useful life

Question 183

Carrying amount - asset’s value reflected in the accounts. cost of the asset less accumulated depreciation

Answer 183

Carrying amount (NBV) = cost - accumulated depreciation

Question 184

straight line depreciation - annual dep charge same throughout asset’s useful life:

Answer 184

Annual deprec = (cost - residual value) / useful life

Question 185

reducing balance method - recalcs annual depreciation by applying a percentage to the carrying amount

Answer 185

Annual depreciation = carrying amount x depreciation rate %

Question 186

Machine hour method:(calc according to how much the asset used each year)
Depreciation per machine hour

Answer 186

= (cost - residual value) / useful life in hours

Question 187

Annual depreciation = depreciation per machine hour x Actual usage hours

Question 188

Product Units Method

Depreciation per production unit = (cost - residual value) / expected production units

Answer 188

Annual depreciation = depreciation per production unit x actual units produced

Question 189

In the product units or machine hours method, the depreciation charged each year would be according to the actual levels of production or machine hours used. Note that:
If production levels or machine hours are higher than expected, then the asset will be fully depreciated earlier than planned
If production levels or machine hours are lower than expected, the asset will be fully depreciated later than planned.
In these methods, depreciation stops when the carrying amount equals the asset’s residual.

Question 190

Ch9 job costing ->

Answer 190

process of calculating the costs of a specific job

A job is a cost unit that consists of a single order or contract. Compared to continuous production, it is usually limited in scope and period.
A job may be a single physical product, several products or a service

Question 191

Job costing process

Answer 191

Customer specifies requirements
Specification and delivery date agreed
Supplier estimates pricing
Pricing agreed
Job scheduled for production

Question 192

Job records
1 each job given a unique code
2 All direct costs associated with the hob are coded directly to the job code
3 A share of overheads calculated and charged to the job

Answer 192

4 Job cost is calclulated, usually on job cost card
5 difference between actual costs and agreed selling price is the profit

Job cost cards are usually created and held electronically in the computerised accounting system.

Question 193

When job is planned, cost cared prepared with expected costs. Cost card will be used to create a budget for the job. The actual costs will be recorded in the accounting system

Answer 193

Cost-plus pricing method adds the required profit to the total cost of the product or job

The required profit may be expressed as:
Mark-up %
A percentage of the cost.
Margin %
A percentage of the selling price.

*Note that although markup is usually calculated as a percentage of the total cost, it may have other bases (such as a percentage of total direct costs).
Margin is always expressed as a percentage of the selling price (which is 100%).

Question 194

Batch Costing Principles - several units rather than single unit

Answer 194

Used in manufacturing - large numbers of items or liquids made

eg. computer chips, inks, tshirts

Cost per unit = total batch cost / number of units in a batch

Question 195

Set Up costs

• cleaned and set up for next batch to be processed

Set up costs can be high, so they are included in the batch cost as a direct expense

Question 196

cost control strategies
- focus on highest costs and what drives them
- reviewing supply chains and buying as close to the source as possible
- renegotiate contracts
- invest in mechanisation
- invest in training of labour
- examine and improve remuneration processes
- evaluate asset expenditure carefully
- examine variances and their relationships
- use budgets effectively
- implement strong financial controls

Answer 196

Cost control in job costing:
- materials
- labour
- equipment
- management

Question 197

Cost controls in batch costing
- area to focus on is set up costs
- the more different batches are, the more significant the set up costs and downtime

Answer 197

Reducing set up costs:
- keeping subsequent batches as similar as possible to the initial batch, minimising changes to the set up
- regular maintenance of production machinery, reducing downtime
- increasing batch size produces more unit per set up
- examining the set up requirements and designing the process to reduce set up costs and downtime

Question 198

Characteristics of Services - SHIP
- Simultaneity - service provider cannot be separated from the service, ‘inseparability’

• Heterogeneity - each instance of the service is unique, unique approach
• Intangibility - services not tangible
• Perishability - services cannot be stored for future use - only relevant at moment of time

Answer 198

also have involvement - customer involved in service delivery eg. client vital to the legal case - wouldn’t exist without them

No transfer of ownership - service is not owned, and cannot be sold to a third party

Question 199

Problems in service costing
- Difficult to identify a cost unit to which costs are allocated
- Indirect costs often a more significant percentage of a service’s cost than a physical product. this makes a meaningful and fair allocation of shared cost necessary
- the number of inputs for each cost unit may be unique

Answer 199

Service cost units:
- Simple cost unit - similar service provided to one customer at a time
- Composite cost unit - made of two parts related to the service’s extent
- Complex services (by job or engagement) - service is unique, personalised, complex, with many cost elements

Question 200

Service cost card would be like a job cost card, with each cost element separately identified

Answer 200

Calculating total cost per service unit:

Cost per service unit = (total cost for period / number of service units in the period) x100

Question 201

Labour cost in services is usually higher than materials, and indirect costs are likely to make up more of the total cost of services than for physical products

Answer 201

Unit costs in not-for-profit organisations:
Often calculate a cost per unit for the following reasons:
- to demonstrate efficiency
- to help measure performance and improvements over time
- to help control costs

Question 202

Absorption costing principles - sharing and absorbing indirect costs (overheads) into the total cost of a unit of product or service

Answer 202

Include overhead costs in the total cost per unit of a product or service to ensure that the total cost per unit is accurate. This is necessary for two reasons:

• to calculate a reasonable selling price and determine whether a product is profitable
• to calculate inventory value accurately

Question 203

ABSORPTION COSTING PORCESS

1. ALLOCATION (of entire cost items to cost centres)
2. APPORTIONMENT (sharing of common costs to production cost centres)
3. ABSORPOTION (absorbing shared costs into cost units)

Answer 203

The organisation’s production site might have several cost centres.
Non-production departments might include sales, distribution and delivery, finance (the accountants!), and human resources. These departments are not directly involved in making or storing the organisation’s products and could be in a different location to the factory and warehouse.

Question 203

Inventory Valuation
Inventory consists of raw materials, bought-in components, work in progress (partially completed products/goods) and finished products/goods. Including overheads in the cost per unit results in a more accurate unit cost, resulting in a more accurate inventory valuation. An accurate inventory value is needed for the following:
Including an accurate inventory figure in the financial statements
Correctly calculate the cost of sales figure, which is used to calculate gross profit or loss in the statement of profit or loss.

Answer 203

*Cost of sales = Opening inventory + Cost of production – Closing inventory

Question 204

Cost centres - department or division that incurs costs

Answer 204

Production Cost Centre
A production cost centre is a department or activity directly producing the cost unit.
Production cost centres in a manufacturer are likely to include activities such as:
Assembly
Mixing
Painting
Packaging
Ageing (holding products to mature)
Molding

Question 205

Service Cost Centre
A service cost centre is a department or activity that provides ancillary services to support production cost centres.

In a manufacturer, these may include the following:
Logistics and warehouse services
Security
Staff canteen and other human resource services
Maintenance
Cleaning

Answer 205

Whole Costs
Whole cost items are overheads (indirect costs) attributable to a single cost centre. They are allocated to a single cost centre.
For example, at T-Shirt Co, the salary of the warehouse manager is a whole cost item as it relates only to the warehouse cost centre.

Question 206

Common Costs
Common costs need to be shared among different cost centres.
For example, the cost of electricity to power the whole factory site is a common cost because it relates to all the cost centres – including the warehouse, assembly centre, cleaning department, purchasing offices, etc.
An apportionment base must be selected to determine how much of a typical cost is to be charged to a cost centre. For example, kilowatt-hours might be the basis for apportioning electricity costs among cost centres.
Remember the absorption costing steps:
- allocation, apportionment, absorption

Answer 206

Allocation involves charging whole overhead cost items to cost centre

Apportionment, the second stage in absorption costing, is sharing common overheads between cost centres.
Examples of common costs:
Building lighting (shared by all cost centres in the building)
All the cost centres also share rent, insurance, and utilities (water and electricity) in the building.

There are two parts to the apportionment stage:
1. apportion all common costs across each production and production service cost centre;
2. reapportion all service costs between the production cost centres. (so all overheads are fully charged to production cost centres).
The aim is to eventually establish the total overhead costs for each production cost centre.

Question 207

Basis of Apportionment

• an apportionment base must be identified to apportion common costs among cost centres
• an apportionment base measures how much the cost centre should be charged for the common cost. it should be fair and measureable.

Answer 207

Examples of bases for apportioning shared overhead costs to different cost centres might include:

eg. floor area - rent, cleaning , utilities

eg. number of employees - canteen, health and safety, training

Question 208

In the exam, read the question carefully to select the most appropriate apportionment base.

Answer 208

Changing apportionment base:
As processes and methods of manufacturing change, the most appropriate apportionment base may also change.
For example, a business has a car park that all staff use: the costs might be shared by apportioning them based on the staff in each department.
If the business were to sell part of the car park and the remaining few parking spaces were reserved for visitors, then the basis for apportionment would need to change from staff per department to visitors per department.

Question 209

Calculating apportionment

Answer 209

1. Identify cost centres, whole costs, and common costs.
2. Allocate whole costs to cost centres.
3. Select an appropriate base for common costs
4. Apportion common costs on the proportion of the apportionment base used by the cost centre.

Question 210

Reapportionment - process of dividing the costs that have been allocated and apportioned from service cost centres to production cost centres

All overheads (including those allocated and apportioned to service cost centres) must be charged to the production cost centres to calculate the total production overhead per cost unit.

Answer 210

Similar to apportionment, a suitable reapportionment base is chosen to share the costs using that base.
MA2 requires an understanding of two methods:

Direct

Step-down

Question 211

Direct Reapportionment Method

The direct reapportionment method is when service cost centre overheads are only apportioned to production cost centres. Services provided to other service cost centres are ignored.

Answer 211

Step down Reapportionment method

In the step-down method, the costs of one service centre (CS1) are reapportioned to the production cost centres and the other service centre (CS2).
The costs of the other service centre (CS2) are then reapportioned to the production cost centres.
The cost centre with the highest total costs, or that carries out the most work for the other service centre, is reapportioned first.
** Read the exam question carefully if it requires step-down reapportionment.
The service cost centre that does not provide services to other service cost centres is reapportioned last.
If this is the above does not apply, and the question does not specify the order of reapportionment, reapportion the service cost centre with the highest cost first.

Question 212

OVERHEAD Absorption rate (OAR)

• final step of absorption costing is to charge the production overheads to output

Answer 212

The overhead absorption rate is the rate at which total production overhead costs are added to the cost per unit of each product.
An absorption base must be determined to calculate the absorption rate. This base, also known as the cost driver, should be linked to the main activities that incur the overheads.
Generally, in absorption costing, two cost drivers are considered:
Direct labour hours would be the driver for production that is labour-intensive.
Machine hours would be the driver for production that is machine-intensive.

Question 213

OAR (approximates overheads incurred) typically calculated using BUDGETED ACTIVITY AND OVERHEADS

Answer 213

Overhead Absorption rate = total overheads of production cost centre / total cost driver

OAR is most fair in simple manufacturing activities where actual output is close to budget, and the labour and machine hour cost drivers account for most of the overhead costs

Question 214

Determining the OAR
- estimating overhead costs
- estimate total activity
- calculate OAR
- charge OAR to output (per unit)

Question 215

Over- or under-absorption occurs when actual overheads are not as budgeted.
Over absorption: more might be charged in overhead costs than the organisation incurs
Under absorption: less might be charged in overhead costs than the organisation incurs.

Answer 215

The amount of overheads calculated as being either over or under absorbed is directly reflected in the statement of profit or loss at the end of the period so that the correct profit or loss, based on the actual overheads incurred, is shown.
Over-absorbed overhead is an addition to profit, whereas under-absorbed overhead is shown as a cost, thereby reducing profit.

Question 216

summary:
- identify overheads and cost centres
- estimate overhead costs
- estimate total activity
- calculate OAR
- Charge OAR to output
- Compare with actual overheads

Question 217

Non-production overheads are not related to the production of goods and services. Examples are finance, sales and marketing, human resources, and administrative overheads.
They are not absorbed into the product costs and are expensed against profit for the period.
For decision-making purposes, non-production costs will be considered when setting the selling price of products, as they also need to be covered.
Non-production overheads may also be included in these calculations at a specific absorption rate (i.e. 25% of production costs).

Answer 217

**Under the accounting standard IAS 2 inventories, the cost of non-production overheads should not be included in inventory valuation.

Question 218

process of including non-production overheads is like that of production overheads:
- estimate overhead costs
- estimate total activity
- Calculate OAR
- charge OAR to output

Answer 218

same steps for absorbing costing for services

Question 219

From the earlier activities, support department costs (Housekeeping, Finance and administration) are Reapportioned to the service delivery centres (Front office and guest services, the hotel restaurant and the function room hire department) using either the direct method or the step-down method.

Answer 219

Absorption

Service delivery costs are absorbed into the service cost units using an appropriate absorption rate:
Remember that services often have composite cost units, such as a ‘guest-night’.
For services, a cost driver is often labour hours. The average staff hours spent on each service unit (hotel guest-night) must be determined.
Predetermined overhead absorption rate (based on direct labour hours)
= Total budgeted overheads for the cost centre/Total budgeted direct labour hours

Question 220

Marginal costing

Answer 220

Marginal costing is a costing method used for short-term decision-making. It facilitates this by recognising costs according to their behaviour.
This means that fixed and variable costs are treated differently, especially in inventory valuation.

Question 221

Fixed costs

Answer 221

Marginal costing expenses fixed costs against profit for the period, not retaining any fixed costs in the inventory valuation. This is because fixed costs do not change in the short-term and are irrelevant to short-term decision-making (they would be incurred regardless of the decision).
Compare this to absorption costing, where fixed costs are allocated, apportioned, and absorbed into inventory. Any unsold inventory would carry a portion of these fixed costs into the next period.

Question 222

Variable costs

**Under marginal costing, inventory is valued at only marginal (variable) production costs.

Answer 222

Under marginal costing, only variable (marginal) costs are included in inventory valuation.
This is because the marginal cost of a product is the increase in expenses required to produce an additional unit, which is usually its variable cost.
For example, if it costs $60,000 to make 10,000 units and $60,003 to produce 10,001 units, the marginal cost of the additional unit is $3.

Question 223

The marginal cost of a product usually consists of the following:

Prime costs:
Direct materials
Direct labour
Direct expenses
Variable production overheads