2. Cost classification

Question 1

what are the different cost classifications?

Answer 1

direct costs - traceabel to a cost object (materials, labour)
Indirect costs - nto directly traceable (overheads)
Product costs - include in inventory (production costs)
Period costs - expensed in the period (admin, selling)
FIxed/variable/semi-variable/stepped costs

Question 2

what are the different cost behaviours

Answer 2

fixed - conatnt in total, varies per unit
variable - constant per unit, varies in total
semi-variable - split into fixed + variable
stepped - Fixed over a range then increases

Question 3

calculation for High low method

Answer 3

1) Chose the highest and lowerest activity levels
2) cal. The variable cost/unit = difference in cost/difference in activity
3) calc. The fixed costs = total costs at any level - (V/C X activity)

Question 4

how to calculate absorption costing

Answer 4

1) calc. cost per unit = direct materials + D Labour + V OH + Fixed OH absorbed
2) calc. OAR = Budgeted OH / Budgeted Activity (units/hours)
3) the inventory valuation includes fixed overheads

Question 5

how to calculate marginal costing

Answer 5

1) calc. Cost per unit = Variable costs only
2) contribution = sales - variable costs
3) profit = contribution - Fixed costs
Fixed overheads are period costs
inventory valued at variable costs only

Question 6

Absorption Vs Marginal profit

Answer 6

Inventory ↑ → Absorption profit > Marginal.
Inventory ↓ → Absorption profit < Marginal.
No inventory change → Same profit.

Question 7

Over/Under absorption

Answer 7

Over-absorbed: Absorbed OH > Actual OH.
Under-absorbed: Absorbed OH < Actual OH.
Causes: capacity changes, efficiency, and budget errors.

Question 8

what is job batch costing

Answer 8

used when. goods are unique or produced in batches
- includes: materials, labour, overhead absorption
Batch costing: cost per unit = Batch cost /Units

Question 9

what is ABC costing

Answer 9

overheads allocated by activities and cost drivers
Cost Driver rate = activity cost /driver volume
More accurate when produces differ in complexity

Question 10

what is a cost centre

Answer 10

is a responsibility centre that incurs costs only, or a centre where the manager is purely responsible for managing costs
appraised on costs e.g IT support

Question 11

what is a revenue centre

Answer 11

is devoted ot raising revenue without any link to the associated costs. might be encountered for non-profit orgs, or in the marketing operation raising sales

Question 12

what is a profit centre q

Answer 12

If a manager is responsible for revenue as well as costs, the centre is a profit centre.
appraised on profit

Question 13

what is an investment centre

Answer 13

if the manager is responsible for decisions as well as revenue and costs
appraised on relavent profit compared to investment

Question 14

what are the different cost terms

Answer 14

cost centre - production or service location ‘charge costs to’
cost unit - what we sell

Question 15

what are the 4 main elements of classifying costs

Answer 15

nature
element
function
behaviour

Question 16

what is examples of classifying costs by element

Answer 16

materials
labour costs - salaries, wages etc
expense - such as rent, business rates, electricity

Question 17

what is examples of classifying costs by function

Answer 17

production costs
non-production costs - not directly involved in making the product - e.g selling, admin, distribution and finance costs

Question 18

what is examples of classifying costs by nature

Answer 18

Prime costs - all direct costs
Overheads - indirect costs but have been incurred in the produciton of products

Question 19

what does cost behaviour mean

Answer 19

do they change with volume and activity and if so how much by

Question 20

what are the different cost behaviours

Answer 20

• Fixed costs - unaffected by fluctuations in levels of activity
• Variable cost - varies in direct proportion with a measure of activity
• stepped fixed costs - type of fixed costs that is fixed within certain levels of activity, once hit, then new level of activity cost is reached
  -semi-variable cost

Question 21

what is the purpose of high low method

Answer 21

identify the fixed and variable costs

Question 22

what is the cost equation

Answer 22

y = a + bx

y = dependent variable
a = intercept on Y-axis
x = independent variable
b = gradient on the line