Cost Accounting

Chapter 1 Cost Classification, Concepts and Terminology

Answers to Test Your Understanding

1.
(a) (i) Financial accounting
(ii) Management accounting

(b) (i) Financial accounting only provides financial information from the past
Management accounting provides financial information from the past, present and future.
(ii) Financial accounting mainly provides information for people outside the company.
Management accounting mainly provides information for people inside the company.
2.
(a)
$
Direct materials 1,000,000
Direct labour 657,000
Royalties 300,000
Direct costs 1,957,000
(b)
$
Factory manager’s salary 390,000
Rent and rates ($120,000 × 70%) 84,000
Depreciation of Plant and machinery 15,000
Production overheads 489,000
(c)
$
Office staff salaries 214,000
Rent and rates ($120,000 × 30%) 36,000
Depreciation of office furniture 7,000
Administrative expenses 16,000
Sales commission 40,000
Non-production overheads 313,000
3.
(a) Direct cost refers to the cost of which specific cost unit (product) or cost centre can be
directly recognised.
Indirect cost refers to the cost of which specific cost unit (product) or cost centre cannot
be directly recognised.
(b) Direct cost: baker’s monthly salary
Indirect cost: monthly rent

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

4. Production overhead Non-production overhead

(a) Production and sale (i) Plant Insurance
of sports shoes (ii) Depreciation of production
machinery
(iii) Rent of factory
(Any reasonable answer is
acceptable)
(b) Catering services (i) Salaries of restaurant
waiters/waitresses
(ii) Depreciation of restaurant
furniture
(Any reasonable answer is
acceptable)
(i) Staff commission based on sale
amounts of sports shoes
(ii) Salaries of administrative staff
(Any reasonable answer is acceptable)
(i) Staff commission based on sale
amounts of restaurant gift vouchers
(ii) Salaries of administrative staff
(Any reasonable answer is acceptable)

5. Using the high-low method,

Unit variable cost = ($230,000 - $200,000) ÷ 12,000-10,000) unit = $15 per unit
Total fixed cost = $230,000 – (12,000 × 15) = $50,000

6. Using the high-low method,

Variable cost per direct labour hour
= ($35,240 - $25,750) ÷ (1,980 - 1,250)
= $13 per direct labour hour

Total fixed costs in direct labour costs

= $35,240 - 1,980 × $13
= $9,500

Budgeted direct labour costs in January 20X4

= $9,500 + 1,670 × $13
= $31,210

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

7.
Model A Model B Model C
$ $ $
Direct material 40 100 120
Direct labour 5 5 6
Variable production overheads 10 16 30
Rent apportionment (W1) 2 2 2
Unit production cost 57 123 158

Production units 20,000 40,000 60,000

Total production cost 1,140,000 4,920,000 9,480,000

Model A Model B Model C

$ $ $
Sales (W2) 1,600,000 6,000,000 10,800,000
Total production cost (1,140,000) (4,920,000) (9,480,000)
Selling and administrative expenses
(W3) (140,000) (280,000) (480,000)
Net profit 320,000 800,000 840,000

(W1) Total production units 20,000 40,000 60,000 120,000 units

Rent apportionment for each unit $240,000 ÷ 120,000 = $2 per
unit
(W2) Sales of Model A 20,000 × $80 $1,600,000
Sales of Model B 40,000 × $150 $6,000,000
Sales of Model C 60,000 × $180 $10,800,000
(W3) Selling and administrative expenses of Model A 20,000 × $7
$140,000
Selling and administrative expenses of Model B 40,000 × $7
$280,000
Selling and administrative expenses of Model C 60,000 × $8 = $480,000

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

8. (a)
Production cost budget
$
Direct material ($30,000 ÷ 10000 × 13,000) 39,000 (W1)
Direct labour ($80,000 ÷ 10000 × 13,000) 104,000 By high-low
Variable production overheads (W1) ($2 × 13,000) 26,000 method,
Variable production cost 169,000
Fixed production overheads (W1) 20,000 Unit variable cost =
Total production cost 189,000 ($44,000 - $40,000)
÷ (12,000 - 10,000) = $2 per unit
Total fixed cost = $ 40,000 – ($2 × 10,000) = $20,000

(b) $
Direct material ($30000 ÷ 10000) 3
Direct labour ($8000 ÷ 10000) 8
Production overheads (W1) 2
Sale and distribution expenses ($20,000 ÷ 1000) 2
Unit variable cost 15

9. .
(a) Fixed cost: the salary of office clerk
Variable cost: direct material/direct labour
(b) By high-low method,
Variable cost per unit in production overheads
= ($24,000 - $18,000) ÷ (7,000 - 4,000)
= $2 per unit
Total fixed cost in production overheads
= $18,000 - (4,000 × $2)
= $10,000
$
Direct material ($6 × 5,000) 30,000
Direct labour ($7 × 5,000) 35,000
Prime cost 65,000
Production overheads [$10,000 + ($2 × 5,000)] 20,000
Total production cost 85,000

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 Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

(i) Variable production cost $

Direct labour 118,000
Direct material 60,000
Carriage 1,200
179,200
Fixed production cost
Salaries of factory supervisors 40,000
Plant insurance 2,500

depreciation of machinery 5,000

Small means of production 3,000
Plant maintenance 5,000
55,500
Non-variable production cost
Sale commission (based on amount of sales) 80,000
Non-fixed production cost
Advertising expenses 50,000
Depreciation of office equipment 4,000
General office expenses 10,000 .
64,000

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

11. .
$
Direct material ($15 × 3 hours × 1,000) 45,000
Direct labour ($10 × 0.5 hours × 1,000) 5,000
Electricity and water fees 14,050
Insurance 9,000
Carriage outward (3kg × 1000 ÷ 500 kg × $800) 4,800
Total cost 77,850
Mark-up ($77,850 × 50%) 38,925
Selling price 116,775

12. (a).
$
Cost of sales 1,950,000
Sales commission (5,500,000 × 15%) 825,000
2,775,000
555
Unit variable cost ( )

(b) $
3,080,000
Sale ( × 0.7 × 4,000)

Less: Total variable cost (555 × 4,000) 2,220,000

Salary of shop manager 150,000
Operating expenses of shop 600,000
Promotion expenses 116,000 3,086,000
Net loss (6,000)

14. (a)
Total cost (2,500 units) Total cost (3,500 units)
Production overhead $4.8 × 2,500 = $12,000 $3.8 × 3,500 = $13,300
Selling overhead $1.4 × 2,500 = $3,500 $1 × 3,500 = $3,500
Since the unit costs of direct materials and direct labour remain constant at both activity levels,
so they are variable cost.

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

Since the total cost of selling overhead remains unchanged, so it is fixed cost.
Since the total cost of production overhead remains unchanged and the production overhead per
unit is decreased, so it is a mixed cost.
Variable cost per unit in production overhead = ($13,300 - $12,000) ÷ (3,500 - 2,500) = $1.3
Total fixed cost in production overhead = $12,000 - ($1.3 × 2,500) = $8,750
Variable cost per unit = $9.6 + $17.0 + $1.3 = $27.9
Total fixed cost = $8,750 + $3,500 = $12,250

(b)
Direct costs are the costs that can be specifically and exclusively attributed to a particular cost
object but indirect costs are the costs that cannot be identified specifically and exclusively with a
given cost object.
Prime costs are the production costs that can be traced to a particular cost object. Conversion
costs the productions costs other than direct materials.

15. (a)
Within the relevant range, fixed cost is unaffected by fluctuations in the levels of activity.
Variable cost is a cost which varies proportionately with a change in the levels of activity.

(b)
Even though annual depreciation using reducing balance method declines over time, such
decline is unaffected by fluctuations in the levels of activity. Thus, such depreciation should be
classified as a fixed cost.

16. (a) (i)

Unit selling price = $85,000 ÷ 1,000 or $127,500 ÷ 1,500 = $85

(ii)
Direct materials cost per unit = $30,000 ÷ 1,000 or $45,000 ÷ 1,500 = $30

(iii)
Direct labour cost per unit = $29,000 ÷ 1,000 or $43,500 ÷ 1,500 = $29

(b) (i)
Variable production overhead per unit =
($13,000 - $10,000)
(1,500 - 1,000) = $6 per unit

(ii)

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

Fixed production overhead

= $10,000 - $6 × 1,000 or $13,000 - $6 × 1,500
= $4,000

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Cost Accounting
Chapter 1 Cost Classification, Concepts and Terminology

(c)
Contribution per unit
= $85 - $30 - $29 - $6
= $20
Break-even units
$4,000
=
$20
= 200 units

17.
Direct costs are those costs which can be specifically and economically traced to a cost unit.

(ii)
Indirect costs are those costs which are not classified as direct costs.

(d)
Royalty payment can be a direct cost or an indirect cost. Classification depends on how the
amount of royalty payment is ascertained.
If royalty payment is based on number of units produced (or any other basis related to
production level), it is classified as a direct cost.

If royalty payment is based on number of units sold (or any other basis related to sales level), it
is classified as an indirect cost.

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