Module 2

Question 1

What is a cost centre?

Answer 1

When costs are incurred they are allocated to a cost centre
Acts as a collecting place for expenses
Separately identified and controlled

Question 2

What are some of the major functional areas of a manufacturing business?

Answer 2

Production- raw materials into finished goods
Service- allow other functions to oeprate
Admin- overall management
Sales- securing orders
Distribution- warehousing and delivery

Question 3

Research and Development costs arise where?

Answer 3

Expenditure incurred in seeking new products or processes or ways of improving existing
Expenditure incurred in the development of research ideas to a level that may be implemented

Question 4

Controllable vs non-controllable costs?

Answer 4

Managers must only be assessed on the basis of costs, revenues and investments which are under their control

Question 5

What are the different types of responsibility centre?

Answer 5

Cost centre
Profit centre
Investment centre
(rising level of responsibility)

Question 6

Features of an effective responsibility centre?

Answer 6

Clear definition of the centre boundaries
Clear link with manager responsible
Costs and revenues should be analysed into clearly defined categories

Question 7

Cost centre responsibilities?

Answer 7

Does not generate any revenue
Provides support to other areas of the business
Manager only has discretion over costs, no influence on revenues or investment

Question 8

Profit centre responsibilities?

Answer 8

Manager both responsible for costs and revenue, so profit

e.g. products under one manager

Question 9

Investment centres responsibilities?

Answer 9

Authority to undertake capital expenditure as well as managing revenues and related costs
Cap ex is the purchase of fixed assets

Question 10

What are direct unit costs?

Answer 10

Can be identified easily with a product or service

Question 11

What are direct expenses?

Answer 11

Other costs which are traceable to individual units e.g. royalty payments for each unit, design costs for custom order

Question 12

What is prime cost?

Answer 12

Sum of direct material cost, direct labour cost and direct expenses
Total of all cost items which can be charged directly to product units

Question 13

What are indirect unit costs?

Answer 13

Can’t be easily identified with a product or service

Can only be charged to a cost unit on estimate

Question 14

What are overhead expenses?

Answer 14

Indirect expenses

Shared between various products passing through the factory

Question 15

What is the graph for fixed costs?

Answer 15

Straight horizontal line between price and activity

E.g. depreciation, rent

Question 16

What is the graph for variable costs?

Answer 16

Starts at 0, positive correlation between price and activity

E.g. direct material cost (constant prices)

Question 17

What is the graph for semi-variable cost?

Answer 17

Starts above 0 and positive correlation
Fixed charge plus rate per unit
e.g. telephone

Question 18

What is the graph for a semi-fixed cost?

Answer 18

Stepped cost (like stairs)
Fixed charges change at discrete activity levels 
E.g. extra salaries each time extra shift worked

Question 19

Planning of activity level costs?

Answer 19

Identify nature of cost items to produce accurate budgets at expected levels of output
Variable costs will increase if higher outputs are expected, fixed won’t

Question 20

Control of activity level costs?

Answer 20

Comparing actual to planned results
If actual output different to expected can’t meaningfully compare
Identify variances

Question 21

What is cost plus pricing?

Answer 21

Work out cost to produce then use this as a basis to decide the price
Cost plus mark-up (percentage of cost)

Question 22

What is contribution?

Answer 22

Sales- variable costs

Question 23

Why use contribution?

Answer 23

Gives a better indication of the likely effect of increased or decreased sales of any product on profit

Question 24

What is the overriding requirement or information to aid decision making?

Answer 24

Relevance

Question 25

What are the sub-classifications of relevant cost?

Answer 25

Avoidable costs
Incremental costs (vs sunk/committed)
Opportunity costs

Question 26

What is an avoidable cost?

Answer 26

One that will ceased to be incurred as a result of a decision
Only included in decision making if it is avoidable

Question 27

What is an unavoidable cost?

Answer 27

Continue after a decision has been taken

Question 28

What are incremental costs?

Answer 28

Additional cost that is only incurred if you follow a course of action

Question 29

What is a sunk cost?

Answer 29

Cost which has already been incurred and is irrelevant to the decision making process
E.g. depreciation, development, materials in stock

Question 30

What are opportunity costs?

Answer 30

Cost of the next best alternative use for the resource

Question 31

What are the key considerations to be made in relation to staff relevant costs?

Answer 31

Are they paid regardless?

Are they full utilised?

Question 32

If staff are paid a salary but not fully utilised what is the relevant cost?

Answer 32

Nil

Salary paid regardless- a sunk cost

Question 33

If staff are paid a salary and are fully utilised, what is the relevant cost?

Answer 33

Either the lost income or any overtime you may have to pay

Question 34

If staff are not paid a salary and not being fully utilised what is the relevant cost?

Answer 34

The extra (incremental) cost of hiring these staff

Question 35

If staff are not paid a salary and are being fully utilised what is the relevant cost?

Answer 35

Lost income from taking them away from what they’re currently working on

Question 36

What should you consider in terms of relevant cost for materials?

Answer 36

Are they already in stock?

Are they in regular use?

Question 37

What is the relevant cost if the materials are in stock?

Answer 37

Cost of purchasing

Question 38

What is the relevant cost if the materials are in stock and are regularly used in the business?

Answer 38

Cost to replace the goods so they can be used in future contracts

Question 39

What is the relevant cost if materials are not in regular use and there is nothing else we can do with the materials?

Answer 39

0

Initial purchase is sunk

Question 40

What is the relevant cost if the materials are not in regular use but there are other options for them?

Answer 40

Normally the most expensive of these other options- lose out on