Full Costing

Question 1

Management’s needs for
information about costs

Answer 1

To control costs

1. To aid planning
2. To value inventories
3. To aid the setting of selling prices
4. To ascertain the **relative profitability of **
5. products

Question 2

The nature of full costing

 Full costing concerns

Answer 2

with all costs involved with achieving some objective eg. making a particular product

eg. rent is a cost. but if the factory was not rented, there would be nowhere for production to take place, so rent is an important element of the cost of each unit of output

Question 3

The nature of full costing

Full cost is

Answer 3

total amount of resources, usually
measured in monetary terms, sacrificed to
achieve a particular objective

eg. objective: supply customer with good or service. delivery of the service or product to the customer’s premise would be included as part of the full cost

Question 4

The nature of full costing

If a business is trying to set prices that cover all
costs

Answer 4

full costing is used to determine the
minimum price of the product or service

Question 5

Deriving full costs

In a one product line or service
(each unit of product or service is identical):

Answer 5

add all of the costs of production (materials, labour, rent, fuel) and divide by the
number of units of output for the period

Question 6

Deriving full costs

In a multi-product operation (units of output are
not identical):

Answer 6

costs are separated into two
categories
 Direct costs
 Indirect costs

Question 7

Direct and indirect costs

 Direct cost

Answer 7

a cost that can be traced easily and
accurately to a cost object, e.g. the cost of tyres
for a car

Question 8

Direct and indirect costs

what is a ‘cost object’?

Answer 8

‘cost object’ is an object for which costs are
measured and assigned. Examples of a cost
object:
a product
a customer
a department
a project
an activity, e.g. setting up equipment

Question 9

Direct and indirect costs

Indirect cost (or overheads) are

Answer 9

costs that cannot be traced easily and accurately to a cost object, or is it economically feasible to do so, eg. rent of the garage premise would be an indirect cost of a motor repair

Question 10

Direct and indirect costs

The full cost of a cost object is

Answer 10

The full cost of a cost object is the sum of direct
costs and a fair share of indirect costs.

Question 11

Direct and indirect costs

how is it different to fixed and variable costs?

Answer 11

fixed and variable costs are oncerned with changes to the volume of output. Directness of costs is entirely concerned with collecting together the elements that make up full cost

Although fixed costs tend to be indirect
costs (overheads) and variable costs tend to be direct
costs, there are many exceptions to this
tendency

eg. labour is a major element of direct cost.

Full cost = indirect costs + direct costs

Full cost = fixed costs + variable costs

these two facts are independent of one another

Question 12

Costing in multi-product firms

what are the two main problems?

Answer 12

Two main problems:
1. set up a system to ascribe all possible
direct costs to individual products or
services
2. allocate indirect (or overhead) costs to
individual products or services

Question 13

Answer 13

Question 14

Answer 14

Question 15

Answer 15

Question 16

However by 2008/9:
Robotics had been introduced which:
 reduced the use of labour substantially,
 slightly increased the materials used but
 increased the expenses of plant & machinery.
As a result the costs described as “overheads” in
2008/2009 are a far higher % of all costs.

Answer 16