Topic 1 - Relevant Costing

Question 1

Value added costs

Answer 1

The costs that are added to products/services that the customers would miss if they left them out

Question 2

Non-Value added costs

Answer 2

Customers would not miss these, don’t make a difference to the final product. Don’t add value

Question 3

learning curve

Answer 3

• Time increases, workers learn and get better at their jobs
• Shows how labor hours decrease as units of production increase, because of learning.

Question 4

CAT Table

Answer 4

Unit - Average time - Total Time x - Incremental -

Question 5

IUT Table

Answer 5

Unit - Incremental - Total Time + - Average Time /

Question 6

Uses of learning curve

Answer 6

• Predicting Labour hours and costs
• Useful for budgeting, setting standards, evaluating performance, and scheduling.

Question 7

Limitations

Answer 7

• Decrease in repetitive labour jobs
• Debatable to assume that there is a constant rate of learning
• High turnover might prevent reaching an equilibrium
• Influence of worker motivation

Question 8

Absorption Costing Format

Answer 8

Sale
- COGS
= Gross Margin
- Period Costs
+/- PVV
= Profit

Question 9

Variable Costing

Answer 9

Sales
- VC
= Total CM
- FC
= Profit

Question 10

What is Absorption costing

Answer 10

All costs related to manufacturing a product are included in the inventoriable costs. Expensed with the product

Question 11

What is Variable costing

Answer 11

Only VMOH costs are included in product costs, FMOH is not treated as part of the product cost and therefore is expensed in the period it incurred.

Question 12

When Sales < Production

Answer 12

The company produces more units than it sells. Some units remain unsold.

Absorption
- Some FMOH is included in the cost of the unsold units therefore not expensed in the current period and are deferred to future periods. Therefore Operating income would be higher because a portion of the FMOH is carried forward as inventory and only expensed when those units are sold

Variable
- All FMOH is expensed in that current period regardless of how many units were sold or remain in inventory.Therefore the Variable costing would have lower operating income as the entire overhead is expensed in that cyrrent period even though some units remain.

Question 13

When Sales > Production

Answer 13

When the company sells more units than it produces in the period it means it must sell units from the beginning period.

Absorption costing
- Include FMOH from the current period and some of FMOH from the beginning period. The FMOH that was deferred in previous periods is now being expensed as part of the COGS. Therefore the operating income would be lower than the Variable Costing because the previously deffered FMOH is hitting the income statement.

Variable costing
- Since FMOH is fully expensed in the currrent period that the products are produced, the operating income is not affected by the sale of inventory that was produced earlier. Therefore under variable costing Operating profit would be higher.