The fundamentals of costing Flashcards
A cost unit is:
- A: a unit of product or service in relation to which costs are ascertained
- B: the cost per hour of operating a machine
- C: the cost per unit of electricity consumed
- D: a measure of output of work in a standard hour
A - a unit of product or service in relation to which costs are ascertained
The cost per hour of operating a machine and the cost per unit of electricity consumed are examples of the cost of input resources, which might form part of the total cost of a cost unit.
A measure of output of work in a standard hour is an indication of productivity.
Certain types of income and cost are of no interest to the cost accountant.
An example of such income or cost is:
- A: indirect labour
- B: purchase of raw materials
- C: dividends received
- D: rent paid on a factory
C: dividends received
Dividends received are not related to the production process. This is income received from
investments. Cost accountants are only interested in income and costs relating to production (or manufacturing).
Indirect labour is incorrect. The cost accountant is interested in the cost of indirect labour as it affects
the cost per unit of production.
Purchase of raw materials is incorrect. The cost accountant is interested in the cost of raw materials as
it affects the cost per unit of production.
Factory rent is incorrect. The cost accountant is interested in factory rent as it affects the cost per unit
of production.
Variable costs are conventionally deemed to:
- A: be constant in total when production volume changes
- B: be constant per unit of output
- C: vary per unit of output as production volume changes
- D: vary, in total, from period to period when production is constant
B: be constant per unit of output
Variable costs are constant per unit of output. As output changes, total variable costs will vary in
direct proportion to the level of activity.
Variable costs are not conventionally deemed to be constant in total when the production volume
changes. This is a definition of fixed costs, ie, costs which do not change as outputs change.
Variable costs are also not deemed to vary per unit of output as production volumes change.
Variable costs are constant per unit regardless of output levels.
Variable costs do not vary, in total, from period to period when production is constant. If production
is constant, variable costs will also be constant.
Which of the following costs would not be the concern of the supervisor of a production department?
A: Material costs
B: Labour costs
C: Maintenance costs for a machine
D: Lease payments on a machine
D: Lease payments on a machine
The decision to take out a lease would have been made by the finance function and not be of
relevance to production.
A supervisor would be concerned with material costs because he or she is responsible for the
efficiency with which materials are used.
A supervisor would be concerned with labour costs because he or she is responsible for the
efficiency with which labour work.
A supervisor would be concerned with maintenance costs because he or she is responsible for the manner in which machines are operated.
A hospital has total costs of £1 million for 20X1. During 20X1, 200,000 patients were treated and5
doctors were paid £500,000.
Requirement
What is the most appropriate cost per patient for the hospital to use?
£0.20A
£2.50B
£5.00C
£7.50
C: £5.00
Cost per unit = Total cost/Number of patients treated
£1m/200,000 = £5 per patient
Bo Feeters Shoes Ltd manufactures two types of shoe in its factory.
A typical monthly budget is as follows:
Shoe Type A:
Monthly output: 2,100 units
Time per unit: 24 minutes
Shoe Type B:
Monthly output: 4,400 units
Time per unit: 36 minutes
Unavoidable non-productive time is 20% of productive time, and is paid £4 per hour.
Operatives are paid £3.60 per unit of shoe Type A produced and £6 per unit of shoe Type B.
What is the monthly cost of operatives’ wages in the factory?
A: £13,920
B: £33,960
C: £36,744
D: £50,664
C £36,744
Therefore the correct answer
= Total cost of shoe Type A + Total cost of shoe Type B
= £8,232 + £28,512 = £36,74
If a sales representative is paid a basic salary plus commission for each sale made, this wage cost is best described as:
A: a semi-variable cost
B: a fixed cost
C: a variable cost
D: a production cost
A
The basic salary is fixed, but the sales representative also receives commission, which increases as sales increase. The cost is therefore best described as semi-variable.
Prime cost is:
A: the total of all direct costs
B: the total of all costs incurred in manufacturing a product
C: the same as the fixed cost of a cost unit
D: any cost which does not vary with changes in output levels
A
In other words, prime cost is the total of all the costs that can be directly attributed to a cost unit.
Total manufacturing cost would include overheads in addition to the costs that are directly
attributable to a cost unit.
Fixed costs attributed to a cost unit are not the prime cost because the variable costs have not been
considered.
Any cost which does not vary with changes in output levels is a description of a fixed cost.
A cost which contains both fixed and variable components, and so is partly affected by changes in the level of activity is known as:
A: a direct cost
B: a variable cost
C: an indirect cost
D: a semi-variable cost
D: A semi-variable cost
A semi-variable cost contains both fixed and variable components.
A direct cost is affected by changes in the level of activity, but may not be semi-variable.
A variable cost is wholly dependent on the level of activity.
An indirect cost may be fixed and/or variable but is not necessarily made up of both fixed and
variable elements
Which of the following costs are fixed per unit, but change in total, as production levels change?
A: variable costs
B: direct costs
C: fixed costs
D: step costs
Correct answer(s):
Variable costs - A
For example, fixed costs do not vary with output levels
If an assembly line supervisor is paid a salary of £100 each week and an additional £0.10 for every unit of production made in the week, this wage could be described as:
A: a semi-variable cost
B: a fixed cost
C: a variable cost
D: a step cost
Correct answer(s):
A: a semi-variable cost
As the salary contains both a fixed element (the basic wage) and a variable element (the £0.10 paid
per unit) the wage expense is a semi-variable cost.
It is not a fixed cost, because the total amount paid each week varies with the amount produced
during the week, nor a variable cost, as even if no units were produced the supervisor would still
receive the basic salary (£100).
And finally it is not a step cost, because it does not remain constant for a given range of output, and
then ‘step up’ to a new level, but increases (by £0.10) for each additional unit produced
A factory making soft toys uses a particular machine on each production line. Each machine costs £1,000 per month to hire. Each production line can make up to 100 toys per month
Which of the following best describes the cost of hiring the machines?
A: a step cost
B: a variable cost
C: a fixed cost
D: a semi-variable cost
A: a step cost
As the hiring cost remains fixed within certain activity levels it is a step cost.
Although the cost may increase with output it remains constant for certain activity levels. It is
therefore not a variable cost.
If the factory made between 1 and 100 toys in one month the cost would be £1,000. However, if they
made 101 toys they would need two production lines, and therefore two machines. The cost would
then be £2,000. As this cost can be seen to increase with output it cannot be fixed.
This cost remains constant within a range of activity levels. It is therefore not a semi-variable cost.
The annual salary paid to a business’s financial accountant would best be described as:
A: a variable administrative cost
B: a fixed production cost
C: part of prime cost
D: a fixed administrative cost
D: a fixed administrative cost
As the salary paid to the financial accountant is unlikely to change if output levels change the cost is
fixed, and as the expense relates to the business’s administration it is an administrative cost
A company’s telephone bill consists of two parts:
a) a charge of £40 per month for line rental
b) a charge of £0.01 per minute of call time
Which of the following equations describes the total annual telephone cost, C, if the company uses T
minutes of call time in a year?
A: C = 480 + 0.01T
B: C = 40 + 0.01T
C: C = 480 + 0.12T
D: C = 40 + 0.01T/12
A: C = 480 + 0.01T
A standing charge of £40/month is £480 per year. Costs then increase by £0.01/minute.
Which of the following statements is correct?
A: The use of cost accounting is restricted to manufacturing operations.
B: The format of management accounts is regulated by Financial Reporting Standards.
C: Management accounts are usually prepared for internal use by an organisation’s managers.
D: Financial accounts and management accounts are each prepared from completely different sets
of basic data.
C: Management accounts are usually prepared for internal use by an organisation’s managers
The management accounts provide information to managers within a business to help them to
manage the business by making planning and control decisions. In contrast, the financial accounts
are usually prepared for stakeholders external to the organisation.
