Types of expenses

Question 1

Type of expenses diagram

Answer 1

Question 2

Graph of fixed and variable costs

Answer 2

Question 3

Separating Fixed and Variable costs

Answer 3

It is important to be able to identify the amount of fixed and variable costs. Sometimes the information is given to you but sometimes it is not.
Where total costs are known for two levels of output, the amounts of fixed and variable costs can be worked out using the ‘high/low’ method

Question 4

Separating Fixed and Variable costs

Where total costs are known for two levels of output, the amounts of fixed and variable costs can be worked out using the ‘high/low’ method.

Example of High / Low method:
- At output of 1,000 units, total costs are £7,000
- At output of 2,000 units, total costs are £9,000.

What are the fixed costs?
What is the variable cost per unit?
(Note that this only works when the variable cost per unit is constant)

Answer 4

Variable cost per unit - £2000/1000 = £2.00

For 1,000 units:

Total cost = £7,000
Variable cost = 1,000 x £2 = 2,000
Fixed cost = 5,000

Question 5

Costing systems

Going to consider the situation in manufacturing where the cost
object is a product

What are the 2 types of costing systems?

Answer 5

Job-order costing:

• Assume that there are individual products or batches of products
• The products or batches incur different costs so that there is a need to keep track of each product or batch

Process-order costing:

• Used in industries where masses of the same product are produced in a flow process

Question 6

Cost assignment methods

What happens to direct costs vs indirect costs?

Answer 6

• Direct costs - Direct tracing to - Cost Objects
• Indirect costs - go under cost allocations to either: - cause and effect allocations (the more we purchase, the more the cost will increase) or - arbitrary allocations (like direct labour hours or machine hours)

Question 7

Overhead absorption

The number of units produced can be used to work out the
overhead per unit.

But this only works if there are static units produced which
are uniform.

In most manufacturing environments, that is not the case, so
another way to allocate overheads is either: (2)

1. Firstly, the overhead absorption rate (OAR) needs to be
   found.
2. Then this can be applied to the units.

Answer 7

Arbitrary Allocations

• Based on direct labour hours or
• Based on machine hours

Question 8

OAR – Plant wide rate/blanket overhead rate

This is the ___________ of all methods and applies overheads direct to a production department.

This method is only valid for more _______ businesses who do not
have _________ departments or _________ ________.

What are advantages (2) and disadvantages (3) of this method?

Answer 8

This is the simplest of all methods and applies overheads direct to a production department.

This method is only valid for more simple businesses who do not
have complex departments or multiple products.

Advantages:

• Simple to calculate,
• low cost to implement

Disadvantages:

• Arbitrary,
• simplistic,
• inaccurate

Question 9

OAR – 2 stage allocation process

This is a more complex method of allocating overheads.
Applies to both traditional methods and ABC systems

Traditional costing system: (4)

Answer 9

Stage 1

1. Assign all manufacturing overheads to production and
   service centres
2. Reallocate the costs assigned to service cost centres to
   production centres

Stage 2

3. Compute separate overhead rates for each production
   cost centre
4. Assign cost centre overheads to cost objects

Question 10

What might be used as cost centres in a traditional costing system?

What might be used as an activity cost centre in an activity-based costing system?

Answer 10

What might be used as cost centres in a traditional costing system?

• Mattress line – border added
• Building section – where fillings are added, may include tufting and tape edging.
• Delivery

What might be used as an activity cost centre in an activity-based costing system?

• Steel frame
• Adding border, hand stitching
• Building bed – adding fillings
• Tufting
• Tape Edging

Question 11

OAR – ABC (Activity Based Costing)

This is a much more complex method of allocating overheads.

It identifies activities within a business and assigns costs based on those activities. (3)

Answer 11

Stage 1

1. Activities are divided into activity cost centres.
2. The total cost associated with each activity is allocated to
   the relevant activity cost centre.

Stage 2

3. The total cost in each cost centre is then charged to output
   using a cost driver.