Principles of Costing

Question 1

What are the 4 main cost classifications?

Answer 1

Function, Element, Nature and Behaviour

Question 2

When do we use Function cost classification?

Answer 2

When we are producing financial accounts, we’re required to group the costs depending on which business function incurred them.

Question 3

What are the 4 types of costs in Function classification?

Answer 3

1. Cost of Sales (Production Costs)
2. Selling and Distribution
3. Administrative Costs
4. Finance Costs

Question 4

What are the 3 types of costs in Element classification?

Answer 4

1. Materials
2. Labour
3. Overheads

Question 5

What are the 2 types of costs in Nature classification?

Answer 5

1. Direct Costs
2. Indirect Costs

Question 6

What are total direct costs also referred to by?

Answer 6

Prime Cost

Question 7

What are direct costs?

Answer 7

These are costs that can directly traced to individual units of production.

Question 8

What are indirect costs?

Answer 8

Also known as ‘overheads’ - these are costs that are incurred by the company and which cannot be traced to any one finished unit.

Question 9

When would we use Behaviour classificaton?

Answer 9

Preparing budgets for coming years, which considerations for how costs are likely to change as activity levels change.

Question 10

What are the 4 costs within the Behaviour classification?

Answer 10

1. Variable Costs
2. Fixed Costs
3. Semi-Variable Costs
4. Stepped Costs

Question 11

If my total costs increase as my activity level increases, what type of Behavioural cost is this?

Answer 11

Variable Costs

Question 12

If my total costs stay the same as my activity level increases, what type of Behavioral cost is this?

Answer 12

Fixed Costs

Question 13

If my costs have a fixed and a variable element, what type of behavioural cost is this?

Answer 13

Semi-variable

Question 14

If my total costs are fixed up to a certain level of activity, and then rise if activity goes beyond that level, what type of behavioural cost is this?

Answer 14

Stepped Cost

Question 15

What are the aims of management accounting?

Answer 15

1. Decision Making
2. Planning
3. Communicating
4. Co-ordinating
5. Motivating
6. Controlling

Question 16

What is a cost centre?

Answer 16

A cost centre is a part of the business for which costs can be seperately determined and the manager is responsible for controlling costs only.

Question 17

What is a Revenue Centre?

Answer 17

A revenue centre is a part of the business for which revenues can be separately determined and the manager is responsible only for revenues. These are generally associated with selling activities.

Question 18

What is a cost unit?

Answer 18

A cost unit is an individual unit for which the costs can be separately identified?

Question 19

What is a profit centre?

Answer 19

A profit centre is similar to a cost centre, but has identifiable revenues in addition to costs and the manager is responsible for controlling profits.

Question 20

What is an investment centre?

Answer 20

An investment centre is similar to a profit centre, but occurs when the manager of the centre is responsible for costs, revenues and the level of investment in assets within the division.