An Introduction to cost accounting

Question 1

What is the purpose of cost accounting?

Answer 1

To assist Managers with
decision making
planning for the future
control of expenditure

Question 2

What is another term for ‘cost accounting’?

Answer 2

Management accounting

Question 3

What does Financial accounting involve?

Answer 3

Uses financial data relating to transactions carried out over a period of time. The info is processed through the accounting records and extracted in the form of financial staements - profit and loss and statement of financial position. These statements are required by law (eg Companies Act), and are available to external users (shateholders, suppliers, bank, HMRC, Companies House)

Question 4

What does cost accounting involve?

Answer 4

Uses same data as financial accounting to produce reports containing financial info on recent past &projections for the future. These reports are available to internal users (managers, directors, owners, but not normally to shareholders) and no legal requirement to make the info available to third parties (eg banks). The info is prepared as frequently as required, as it can go out of date very quickly. It is prepared accurately and in line with the ethical principle of integrity - accounting staff are straightforward, and honest in all professional and business relationships.

Question 5

What does ‘integrity’ mean?

Answer 5

Ethical principle requiring accounting staff to be straightforward & honest in all professional and business relationships

Question 6

Definition of ‘cost unit’? - give an example

Answer 6

Unit of output to which costs can be charged - e.g. unit of production such as a car, a television, item of furniture.
Examples of units of service include , passenger on a bus, attendance at a swimming pool

Question 7

Definition of ‘composite cost unit’ - give an example

Answer 7

Unit of output which comprises 2 variables - e.g. cost of a bus passenger, per mile/km, or cost of a hospital patient per day

Question 8

What is a ‘responsibility centre’ & give 4 examples

Answer 8

Segment of a business for which a manager is accountable
Examples are:
Cost centres
Profit Centres
Investment Centres
Revenue Centres

Question 9

What is a ‘cost centre’

Answer 9

Segment of a business to which costs can be charged.

Question 10

What is a ‘profit centre’?

Answer 10

Segment of a business to which costs can be charged, revenue can be identified, & profit can be calculated.

Question 11

What is a ‘investment centre’?

Answer 11

Segment of a business where profit is compared with the amount of money invested in the centre.

Question 12

What is a ‘revenue centre’?

Answer 12

Segment of a business where sales revenue from the product sold or service provided is measured.

Question 13

What is the definition of ‘materials cost’?

Answer 13

The cost of raw materials, components, & other goods sold.

Question 14

What is the definition of ‘labour costs’?

Answer 14

The costs of employees’ wages & salaries

Question 15

What is the definition of ‘expenses’

Answer 15

Other costs, which cannot be included in ‘materials’ or ‘labour’

Question 16

What is a ‘direct cost’?

Answer 16

A cost that can be identified directly with each unit of output

Question 17

What is an ‘indirect cost’ (overhead)

Answer 17

A cost that cannot be identified directly with each unit of output

Question 18

What is a ‘prime cost’ (direct cost)

Answer 18

The total of all direct costs i.e. Materials + Labour + Expenses = Prime Cost

Question 19

What are ‘fixed costs’?

Answer 19

Costs which remain fixed over a range of output levels

Question 20

What are ‘semi-variable costs’?

Answer 20

Costs which combine a fixed and variable element.

Question 21

What are ‘variable costs’?

Answer 21

Costs which vary directly with output

Question 22

What is a ‘total cost statement’?

Answer 22

these are ‘non-production costs’

A list of the total of the direct costs and the overhead.
Direct materials
ADD direct labour
ADD direct expenses
EQUALS **PRIME COST**
ADD Production Overheads
EQUALS **PRODUCTION COST**
ADD selling and distribution costs#
ADD Administration Costs#
ADD Finance Costs#
EQUALS **TOTAL COST**

Question 23

What is a ‘product cost’?

Answer 23

Costs that become part of the manufactured product

Question 24

What is the definition of ‘period cost’?

Answer 24

Costs that cannot be assigned to the manufactured product and are incurred in a period of time, eg monthly

Question 25

What is the formula (calculation) for the total cost of a unit of output?

Answer 25

(Direct cost + indirect costs a.k.a overheads)÷no. of units of output

Question 26

When classifying costs by 'behaviour' how do we describe costs in the short term?

Answer 26

Fixed Semi-variable Variable

Question 27

When classifying costs by 'function' what would the main headings of these costs be?

Answer 27

Production costs Production ``` Non-production costs Administration Selling and distribution Finance (Possibly research and development) ```

Question 28

When classifying costs by 'nature' how do we describe costs?

Answer 28

``` Direct costs (i.e. materials, labour, expenses) Indirect costs a.k.a 'overheads' (i.e. telephone charges, insurance premiums, cost of wages of non-production staff eg managers, admin, finance staff, running costs of delivery vehicles, depreciation charge foe non-current assets) ```

Question 29

When classifying costs by 'element' how do we breakdown the description of costs?

Answer 29

Materials Labour Expenses

Question 30

What are the 3 main sections of a manufacturing business?

Answer 30

Factory - where production tales place & the product is 'finished' &made ready for selling. Warehouse - where finished goods are stored & from where they are despatched when they are sold. Office - where the support staff functions take place e.g. marketing, sales, administration, finance etc

Question 31

How do you calculated the 'return on investment' expressing the figure as a percentage?

Answer 31

(Profit ÷ investment )× 100 = return on investment

Question 32

How do you calculate profit?

Answer 32

Revenue (sales of products/services) - costs = profit (profit centre)

Question 33

How do you calculate 'total indirect costs' (overheads)?

Answer 33

Indirect costs associated with: Materials (e.g grease for machines, cleaning materials) + Labour (wages/salaries paid to all other employees, e.g. managers, supervisors, maintenance staff, administration staff) + Expenses (all other expenses not associated directly with making the product/service - e.g. rent rates, telephone, heating, lighting, depreciation of non current assets, insurance, advertising etc)

Question 34

FORMULA for prime cost

Answer 34

Total of all DIRECT COSTS

Question 35

FORMULA for full absorption cost

Answer 35

Total costs minus Admin, selling and distribution costs

Question 36

FORMULA for marginal production cost

Answer 36

(Direct materials plus Variable Overheads) divided by number of units

Question 37

FORMULA for breakeven volume, in units

Answer 37

Fised Costs divided by contribution per unit

Question 38

FORMULA for margin of safety as a percentage

Answer 38

(Current output minus breakeven output) divided by current output x 100

Question 39

FORMULA for target profit calculation

Answer 39

(Fixed costs plus target profit) divided by contribution per unit equals no. of units

Question 40

FORMULA for Profit volume ratio

Answer 40

Contribution (£) divided by Selling Price (£) Can be expressed as a decimal or a percentage

Question 41

FORMULA for Contribution per unit

Answer 41

Selling price per unit minus variable cost per unit

Question 42

FORMULA for profit

Answer 42

Total contribution minus total fixed costs