Week 4

Question 1

What are the typical classification of costs?

Answer 1

Product allocation (direct and indirect)

Cost behaviour (fixed, variable, semi-fixed, semi-variable)

Product focus (product, period)

Future Costs (relevant, irrelevant)

Unit costs (incremental, marginal)

Other costs (sunk, opportunity)

Question 2

Define direct costs

Answer 2

Costs that can be specifically and exclusively identified with a particularly cost object (direct materials and labour)

Question 3

Define indirect costs

Answer 3

Costs that cannot be specifically and exclusively identified with a particular cost object (overhead costs)

Question 4

What are some examples of indirect costs?

Answer 4

Personal Protective Equipment
Electricity
Recruitment Costs

Question 5

What are examples of fixed costs?

Answer 5

Salaries

Rent

Question 6

What are examples of variable costs?

Answer 6

Materials
Sales commission
Petrol
(as activity level increases, cost increases)

Question 7

What is an example of a semi-fixed cost?

Answer 7

Additional capacity to cope with increased activity

Question 8

What is an example of a semi-variable cost?

Answer 8

Cost of maintenance

where planned maintenance can be fixed, but additional unplanned maintenance would be a variable element

Question 9

With regards to product focus: define product and period

Answer 9

Product - costs that are identified with goods purchased or produced for resale. Costs that are included in the inventory valuation for finished or partly finished goods.

Period - Costs that are not included in the inventory valuation and as a result are treated as expenses in the period they incur

Question 10

With regards to future focus: define relevant costs.

Answer 10

Future costs that will be affected by a decision. For example future orders that haven’t yet been accepted or new hires

Question 11

With regards to future focus: define irrelevant costs.

Answer 11

Future costs that will not be affected by a decision (cost of material in stock)

Question 12

With regards to unit costs: define incremental costs

Answer 12

The differences between costs under each alternative being considered. For example, additional cost of producing an extra 100 units per week

Question 13

With regards to unit costs: define marginal costs

Answer 13

Additional cost of one extra unit from a group of additional units output

Question 14

What is a sunk cost?

Answer 14

Costs that have been created by a decision made in the past and cannot be changed by any decision that will be made in the future

Question 15

What is an opportunity cost?

Answer 15

Costs that measures the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action must be given up

Question 16

Describe overhead allocation

Answer 16

It is a two stage method which allocates overheads and direct costs to cost objects

Question 17

What are some of the main costing methods?

Answer 17

Total absorption costing
Variable costing
Standard costing
Activity based costing
Lifecycle costing
Target costing
Kaizen costing

Question 18

What is a blanket overhead?

Answer 18

A single overhead rate is applied to the organisation as a whole.
These are suitable when processes don’t vary and overheads can be allocated on a consistent basis

Question 19

What is absorption costing?

Answer 19

Both variable and fixed production overhead costs are assigned to products. Every item of cost is taken into account when arriving at the cost of a product of service. You need to carry out adjustments for under/over recovery of overheads

Question 20

Give a brief example of the matching principle

Answer 20

Flu medication-
Increase in the cost of inventory approaching flu season which shows up on the balance sheets but no income is received until the medication has been administered.

Question 21

Compare absorption to variable costing.

Answer 21

When production = sales there is no difference.
When Production>Sales absorption costing produces higher profits
When Sales>Productoin variable costing produces higher profits

Question 22

What are the advantages of absorption costing?

Answer 22

It does not understate the importance of fixed costs
Avoids fictitious losses being reported
Fixed overheads are essential for production
Consistency with external reporting

Question 23

What are the advantages of variable costing?

Answer 23

Provides more useful information for decision making
Removes the effect of inventory changes on profit
Fixed costs are more visible
Avoids fixed overheads being capitalised in fixed unsaleable stock
Easier to understand, closer to cash flow behaviour

Question 24

What is the break even point?

Answer 24

The point of zero profit

Question 25

Standard costing is:
Very complicated and should be avoided unless really necessary

Is really simple but often misleading

Is best used when output is difficult to measure and input can’t be specified

Answer 25

Is really simple but often misleading

Question 26

What is activity based costing?

Answer 26

A method of applying overheads and indirect costs to an activity on the basis of work/cost generated by that activity

Question 27

What are the advantages to ABC?

Answer 27

Links to performance measures
Emphasised activities across departments, moved away from a silo view to model that encourages more collaboration
Gives a more accurate view of costs by job or product line
Identifies opportunities for cost reduction (can act as a continuous improvement tool

Question 28

What are the limitations of ABC?

Answer 28

Requires judgement to select best cost drivers
Can be extremely complex if badly applied
System support is essential
Draws attention to people and their activities and can therefore cause personnel problems

Question 29

What is the procedure of the ABC?

Answer 29

Identify the major activities that take place
Assign Costs to cost pools for each activity
Determine the cost driver for each major activity
Assign the cost of activities to products according to the products demand for activities