Week 1 Important

Question 1

Cost object

Answer 1

A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity and a department.

Question 2

Direct costs and Indirect costs

Answer 2

Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way. Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way.

Question 3

Factors affecting the classification of a cost as direct or indirect include

Answer 3

• the materiality of the cost in question
• available information-gathering technology
• design of operations

Question 4

Cost driver

Answer 4

A cost driver is a variable, such as the level of activity or volume, which causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.

Question 5

Relevant range

Answer 5

The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range.

The range in which the fixed costs won’t change.

Question 6

Unit costs

Answer 6

Unit costs are computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.

Question 7

Manufacturing, retail and service sector companies

Answer 7

Manufacturing-sector companies purchase materials and components and convert them into various finished goods, for example, automotive and textile companies.

Retail-sector companies purchase and then sell tangible products without changing their basic form, for example, retailing or distribution.

Service-sector companies provide services or intangible products to their customers, for example legal advice or audits.

Question 8

DIRECT V INDIRECT
FIXED V VARIABLE

Yeast
Flour 
Packaging materials 
Depreciation on ovens 
Depreciation on mixing machines
Rent on factory building 
Fire insurance on factory building 
Factory utilities 
Finishing department hourly labourers 
Mixing department manager
Materials handlers in each department 
Custodian in factory 
Night security guard in factory indirect, fixed
Machinist (running the mixing machine)
Machine maintenance personnel in each department 
Maintenance supplies for factory 
Cleaning supplies for factory

Answer 8

Yeast direct, variable
Flour direct, variable
Packaging materials direct (or could be indirect if small and not traced to each unit), variable
Depreciation on ovens indirect, fixed (unless ‘units of output’ depreciation, which then would be variable)
Depreciation on mixing machines indirect, fixed (unless ‘units of output’ depreciation, which then would be variable)
Rent on factory building indirect, fixed
Fire insurance on factory building indirect, fixed
Factory utilities indirect, probably some variable and some fixed (e.g. electricity may be variable but heating costs may be fixed)
Finishing department hourly labourers direct, variable (or fixed if the labourers are under a union contract)
Mixing department manager indirect, fixed
Materials handlers in each department depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract then indirect, fixed
Custodian in factory indirect, fixed
Night security guard in factory indirect, fixed
Machinist (running the mixing machine) depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract then indirect, fixed
Machine maintenance personnel in each department indirect, probably fixed, if salaried, but may be variable if paid only for time worked and maintenance increases with increased production
Maintenance supplies for factory indirect, variable
Cleaning supplies for factory indirect, most likely fixed since the custodians probably do the same amount of cleaning every night

Question 9

If the cost object is Mixing Department, then anything directly associated with the Mixing Department will be a direct cost. This will include:

Answer 9

• Depreciation on mixing machines
• Mixing department manager
• Materials handlers (of the Mixing Department)
• Machinist (running the mixing machines)
• Machine Maintenance personnel (of the Mixing Department)
• Maintenance supplies (if separately identified for the Mixing Department)

Of course the yeast and flour will also be a direct cost of the Mixing Department, but it is already a direct cost of each kind of bread produced.