Lecture 5

Question 1

What are the typical classification of costs?

Answer 1

Product allocation (direct and indirect)

Cost behaviour (fixed, variable, semi-fixed, semi-variable)

Product focus (product, period)

Future Costs (relevant, irrelevant)

Unit costs (incremental, marginal)

Other costs (sunk, opportunity)

Question 2

Define direct costs

Answer 2

Costs that can be specifically and exclusively identified with a particularly cost object (direct materials and labour)

Question 3

Define indirect costs

Answer 3

Costs that cannot be specifically and exclusively identified with a particular cost object (overhead costs)

Question 4

What are some examples of indirect costs?

Answer 4

Personal Protective Equipment

Electricity

Recruitment Costs

Question 5

What are examples of fixed costs?

Answer 5

Salaries

Rent

Question 6

What are examples of variable costs?

Answer 6

Materials

Sales commission

Petrol

(as activity level increases, cost increases)

Question 7

What is an example of a semi-fixed cost?

Answer 7

Additional capacity to cope with increased activity

Question 8

What is an example of a semi-variable cost?

Answer 8

Cost of maintenance

where planned maintenance can be fixed, but additional unplanned maintenance would be a variable element

Question 9

With regards to product focus: define product and period

Answer 9

Product - Costs that are identified with goods purchased or produced for resale. Costs that are included in the inventory valuation for finished or partly finished goods.

Period - Costs that are not included in the inventory valuation and as a result are treated as expenses in the period they incur

Question 10

With regards to future focus: define relevant costs.

Answer 10

Future costs that will be affected by a decision. For example future orders that haven’t yet been accepted or new hires

Question 11

With regards to future focus: define irrelevant costs.

Answer 11

Future costs that will not be affected by a decision (cost of material in stock)

Question 12

With regards to unit costs: define incremental costs

Answer 12

The differences between costs under each alternative being considered. For example, additional cost of producing an extra 100 units per week

Question 13

With regards to unit costs: define marginal costs

Answer 13

Additional cost of one extra unit from a group of additional units output

Question 14

What is a sunk cost?

Answer 14

Costs that have been created by a decision made in the past and cannot be changed by any decision that will be made in the future

Question 15

What is an opportunity cost?

Answer 15

Costs that measures the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action must be given up

Question 16

What are some of the main costing methods?

Answer 16

Total absorption costing
Variable costing
Standard costing
Activity based costing
Lifecycle costing
Target costing
Kaizen costing

Question 17

What is a blanket overhead?

Answer 17

A single overhead rate is applied to the organisation as a whole.

These are suitable when processes don’t vary and overheads can be allocated on a consistent basis

Question 18

What is absorption costing?

Answer 18

Both variable and fixed production overhead costs are assigned to products. Every item of cost is taken into account when arriving at the cost of a product of service. You need to carry out adjustments for under/over recovery of overheads

Question 19

Give a brief example of the matching principle

Answer 19

Flu medication:

Increase in the cost of inventory approaching flu season which shows up on the balance sheets but no income is received until the medication has been administered.

Question 20

Compare absorption to variable costing.

Answer 20

When production = sales there is no difference.

When Production>Sales absorption costing produces higher profits

When Sales>Productoin variable costing produces higher profits

Question 21

What are the advantages of absorption costing?

Answer 21

It does not understate the importance of fixed costs
Avoids fictitious losses being reported
Consistency with external reporting

Question 22

What are the advantages of variable costing?

Answer 22

Provides more useful information for decision making

Removes the effect of inventory changes on profit

Fixed costs are more visible

Avoids fixed overheads being capitalised in fixed unsaleable stock

Easier to understand, closer to cash flow behaviour

Question 23

What is the break even point?

Answer 23

The point of zero profit

Question 24

Standard costing is:
Very complicated and should be avoided unless really necessary

Is really simple but often misleading

Is best used when output is difficult to measure and input can’t be specified

Answer 24

Is really simple but often misleading

Question 25

What is activity based costing?

Answer 25

A method of applying overheads and indirect costs to an activity on the basis of work/cost generated by that activity

Question 26

What are the advantages to ABC?

Answer 26

Links to performance measures.

Emphasised activities across departments, moved away from a silo view to model that encourages more collaboration.

Gives a more accurate view of costs by job or product line.

Identifies opportunities for cost reduction (can act as a continuous improvement tool.

Question 27

What are the limitations of ABC?

Answer 27

Requires judgement to select best cost drivers

Can be extremely complex if badly applied

System support is essential

Draws attention to people and their activities and can therefore cause personnel problems

Question 28

What is the procedure of the ABC?

Answer 28

Identify the major activities that take place

Assign Costs to cost pools for each activity

Determine the cost driver for each major activity

Assign the cost of activities to products according to the products demand for activities

Question 29

What are some limitations of a balance sheet?

Answer 29

It presents lagging indicators - looking at the past not the future

Question 30

2 Uses of cost accounting ?

Answer 30

Feeds into financial reports.

Assists decision making.