F2- COST AND COST CLASSIFICATION

ANSWERS

1. 2. 3.

C This is a simple definition of a semi-fixed and semi-variable cost. D Material costs vary with the volume of production. B An overhead cost is an indirect cost. This is cost that cannot be traced directly to a unit of production or sale, or any other cost unit. verheads include indirect materials costs, indirect labour costs and indirect expenses !for example, factory rental costs, machinery insurance costs, machinery depreciation and so on". B A direct cost is a cost that can be traced directly to a unit of production or sale, or another cost unit. $%conomically& means that the benefit from identifyin' and tracin' the direct cost to the cost unit must be worth the cost and the effort. (n practice, this means that low-cost items, particularly low-cost material items, mi'ht be treated as indirect costs because the benefit from the 'reater $accuracy& from treatin' them as direct material costs is not worth the cost and the effort. B D All four items could be treated as direct materials costs. +owever, staples are a very lowcost material item, and it would probably not be worth the effort to treat them as direct material costs to 'ain 'reater accuracy in costin'. (nstead, the cost of staple purchases will probably be treated as an overhead expense. !This illustrates the point that a direct cost is expenditure that can be identified with a specific cost unit, but only if it is $economical& to do so. C A would be a line parallel with the base line showin' units. - would be a line commencin' at $.& and would show a linear pattern. / would show a stepped effect, fixed for a short ran'e, with successive increases. A 1 Total cost of 1),1.. s2uare metres 03,)0) Total cost of 12,,). s2uare metres ,3,3)3 4ariable cost of 2,3). s2uare metres 3,*3) 4ariable cost is 13,*3)52,3). s2uare metres - 1#.1. per s2uare metre. 6ixed costs can be found by substitution7 1 Total cost of 12,,). s2uare metres ,3,3). 4ariable cost of 12,,). s2uare metres !8 1#.1. )2,2,) 6ixed costs 21,*,) 9o for 1*,2.. s2uare metres7 verheads : 121,*,) ; !1*,2.. x 1#.1." : 100,.3)

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3.

C Total cost of 10,).. hours Total cost of 1,,... hours 4ariable cost of 1,).. hours 1 2)1,,). 2#*,).. ),2).

F2- COST AND COST CLASSIFICATION

ANSWERS

4ariable cost per hour : 1),2).51,).. hours : 13.).. Total cost of 1,,... hours <ess variable cost of 1,,... hours !x 13.)." -alance : fixed costs 1.. 11. 12. 13. 1#. 1). 1*. 1,. 10. 13. 2.. B B B D B B C D C B B The royal try cost can be traced in full to the product, i.e. it has been incurred as a direct conse2uence of ma=in' the product. (t is therefore a direct expense. Option A, C and D is all overheads or indirect costs, which cannot be traced directly and in full to the product. B The wa'es paid to the stores assistant cannot be traced in full to a product or service, therefore this is an indirect lab our cost. The assembly wor=er&s wa'es can be traced in full the television manufactured (option A), therefore this is a direct lab our cost. The wa'es paid to plasterers in a construction company can be traced in full to they contract or buildin' they are wor=in' on (option C). This is also a direct lab our cost. The audit cler=s time can be traced to specific clients or >obs (option D) and would therefore be classified as a direst lab our cost. 22. B vertime premium is always classed as factory overheads unless it is? 23. D @or=ed at the specific re2uest of a customer to 'et his order completed. @or=ed re'ularly by a production department in the normal course of operations, in which case it is usually incorporated into the direct lab our hourly rate. 1 2#*,).. )3,).. 10,,...

21.

F2- COST AND COST CLASSIFICATION

ANSWERS

(ndirect costs are those, which cannot be easily identified with a specific cost unit. Althou'h the staple could probably be identified with a specific chair, the cost is li=ely to be relatively insi'nificant. The expense of tracin' such costs does not usually >ustify the possible benefits from calculatin' more accurate direct costs. The cost of the staples would therefore be treated as an indirect cost, to be included as a part of the overhead absorption rate. Options A, B and C all represents si'nificant costs, which can be traced to a specific costs unit. Therefore they are classified as direct costs. 2#. B Pri ! "ost is t#! tota$ o% dir!"t T#!r!%or! t#! "orr!"t ans)!r is -. at!ria$, dir!"t $a& o'r and dir!"t !(p!ns!s.

ption A describes total production cost, includin' absorbed production overhead. Option C is only a part of prime cost. Option D is an overhead or indirect cost. 2). D The mana'er of a profit center usually has control over how revenues is raised, ie sellin' prices (it! (i)) and over the controllable cost incurred in the center (it! (ii) ) Apportioned head office costs (it! (iii)) are uncontrollable from the point off view of the profit centre mana'er. A responsibility centre mana'er does not have control over the capital investment in the centre (it! (i*)) unless the centre is desi'nated an investment centre. 2*. C /ontrollable cost are items of expenditure which can be directly influenced by a 'iven mana'er within a 'iven time span. ption A describes a committed cost. A cost which can be easily analyAed in terms of its cost behavior (option B) would indeed be easier to monitor in terms of flexible bud'et comparisons, but this would not necessarily ma=e it controllable. Option D descries an avoidable cost. 2,. D (t would be appropriate to use the cost per customer account and the cost per che2ue received and processed for control purposes. Therefore it! s (ii) and (iii" are suitable cost units. 9tationary costs, it! cost unit. (i), is an expense of the department, therefore it is not a suitable

F2- COST AND COST CLASSIFICATION

ANSWERS

20.

A A period cost is char'ed a'ainst the sales for the periods. (t is not carried forward in stoc= to a future period. Many period cost can be easily allocated to a period (option B) and are incurred re'ularly (option D). +owever the ma>or distin'uishin' feature of a period cost in the context of cost accountin' is that it is not included in the stoc= valuation for the period. +ence option (A) is the better description. Option C describes a product cost, which is carried forward in the stoc= valuation unit the relevant cost unit is sold.

23.

C The supervisors are en'a'ed in the production activity? therefore option D can be eliminated. They supervise the production of all products? therefore their salaries are indirect costs because they cannot be specifically identified with a cost unit. This eliminates options A and B. The salaries are indirect production overhead costs, therefore option C is correct.

3..

B @ithin the relevant ran'e, fixed costs are not affected by the level of activity therefore option - is correct. ption A describes a linear variable cost. ption / and B could apply to any type of cost, not >ust to fixed costs, so they are not the correct options.

31.

B 4ariable overhead : 103,)0)-1,3,3). 1),1..-12,,). : 13,*3) 2,3).

6ixed overhead

: 1#.1. pre s2uare meter : 1,3,3).-!1#.1.x12, ,)." : 1,3,3).-1)2,2,) : 121,*,) : 121,*,);!1#.1.x1*, 2.." : 121,*,);1**,2#. : 100,.3)

verheads on 1*,2.. s2uare metres

(f you selected option A you calculated the correct amount of variable cost but you for'ot to add on the fixed cost. (f you selected options / and B you calculated a total unit rate from one of the two activities 'iven. +owever, this ma=es no allowances for the instant amount of fixed cost that is included in each of the total cost fi'ures provided. 32. 33. 3#. B Craph 2 shows that increase in line with activity levels. A Craph 1 shows that fixed costs remain the same whatever the level of activity A Craph 1 shows that cost per unit remains the same at different levels of activity

F2- COST AND COST CLASSIFICATION

ANSWERS

3). 3*. 3,.

C Craph # shows that semi-variable costs have a fixed element and a variable element. A Craph 3 shows that the step fixed costs 'o up in $steps& as the level of activity increase. C +i'h output <ow output 4ariable Dnits 1,1.. ,.. #.. 1 10,3.. 13,).. #,0..

4ariable cost per unit 1#,0..51#.. : 112 per unit 6ixed costs :110,3..-!112, x1, 1.." : 1),1.. Therefore the correct answer is /. ption A is the total cost of an activity of ,.. units. ption - is the total variable cost for 1,1.. unit !1,1..x112" ption B is difference between the costs incurred at the two activity levels recorded 30. D The salary is part fixed !1*). per month" and part variable !) pence per unit". Therefore it is a semi-variable cost and answer B in correct. (f you chose option A or - you were considerin' only part of the cost. ption /, a step cost, involves a cost, which remains constant up to a certain levels and then increase to a new, hi'her, constant fixed cost. 33. D The cost describable will increase in steps, remainin' fixed at each step until another supervisor is re2uired. 9uch a cost is =nown as a step cost.