An introduction to cost terms and concepts

For the relevant cost data in items (1)(7), indicate which of the following is the best classification. (a) sunk cost (d) fixed cost (g) controllable cost (b) incremental cost (e) semi-variable cost (h) non-controllable cost (c) variable cost (f) semi-fixed cost (i) opportunity cost (1) A company is considering selling an old machine. The machine has a book value of 20 000. In evaluating the decision to sell the machine, the 20 000 is a ... (2) As an alternative to the old machine, the company can rent a new one. It will cost 3000 a year. In analysing the costvolume behaviour the rental is a ... (3) To run the firms machines, here are two alternative courses of action. One is to pay the operator a base salary plus a small amount per unit produced. This makes the total cost of the operators a ... (4) As an alternative, the firm can pay the operators a flat salary. It would then use one machine when volume is low, two when it expands, and three during peak periods. This means that the total operator cost would now be a ... (5) The machine mentioned in (1) could be sold for 8000. If the firm considers retaining and using it, the 8000 is a ... (6) If the firm wishes to use the machine any longer, it must be repaired. For the decision to retain the machine, the repair cost is a ... (7) The machine is charged to the foreman of each department at a rate of 3000 a year. In evaluating the foreman, the charge is a ... A company manufactures and retails clothing. You are required to group the costs which are listed below and numbered (1)(20) into the following classifications (each cost is intended to belong to only one classification): (i) direct materials (ii) direct labour (iii) direct expenses (iv) indirect production overhead (v) research and development costs (vi) selling and distribution costs (vii) administration costs (viii) finance costs (1) Lubricant for sewing machines (2) Floppy disks for general office computer (3) Maintenance contract for general office photocopying machine (4) Telephone rental plus metered calls (5) Interest on bank overdraft (6) Performing Rights Society charge for music broadcast throughout the factory (7) Market research undertaken prior to a new product launch (8) Wages of security guards for factory (9) Carriage on purchase of basic raw material (10) Royalty payable on number of units of product XY produced (11) Road fund licences for delivery vehicles (12) Parcels sent to customers (13) Cost of advertising products on television
AN INTRODUCTION TO COST TERMS AND CONCEPTS

Question IM 2.1 Intermediate: Cost classification

Question IM 2.2 Intermediate: Cost classification

(14) (15) (16) (17) (18) (19) (20)

Audit fees Chief accountants salary Wages of operatives in the cutting department Cost of painting advertising slogans on delivery vans Wages of storekeepers in materials store Wages of fork lift truck drivers who handle raw materials Developing a new product in the laboratory (10 marks) CIMA Cost Accounting 1

Question IM 2.3 Intermediate: Analysis of costs by behaviour for decision-making

The Northshire Hospital Trust operates two types of specialist X-ray scanning machines, XR1 and XR50. Details for the next period are estimated as follows: Machine Running hours Variable running costs (excluding plates) Fixed costs XR1 1100 () 27 500 20 000 XR50 2000 () 64 000 97 500

A brain scan is normally carried out on machine type XR1: this task uses special X-ray plates costing 40 each and takes four hours of machine time. Because of the nature of the process, around 10% of the scans produce blurred and therefore useless results. Required: (a) Calculate the cost of a satisfactory brain scan on machine type XR1. (7 marks) (b) Brain scans can also be done on machine type XR50 and would take only 1.8 hours per scan with a reduced reject rate of 6%. However, the cost of the X-ray plates would be 55 per scan. Required: Advise which type should be used, assuming sufficient capacity is available on both types of machine. (8 marks) (Total marks 15) CIMA Stage 1 Cost Accounting

Question IM 2.4 Intermediate: Product cost calculation

From the information given below you are required to: (a) prepare a standard cost sheet for one unit and enter on the standard cost sheet the costs to show sub-totals for: (i) prime cost (ii) variable production cost (iii) total production cost (iv) total cost (b) calculate the selling price per unit allowing for a profit of 15% of the selling price. The following data are given: Budgeted output for the year Standard details for one unit: Direct materials 40 square metres at 5.30 per square metre Direct wages: Bonding department 48 hours at 2.50 per hour Finishing department 30 hours at 1.90 per hour Budgeted costs and hours per annum: Variable overhead: () Bonding department 375 000 Finishing department 150 000 9800 units

(hours) 500 000 300 000

AN INTRODUCTION TO COST TERMS AND CONCEPTS

Fixed overhead: Production Selling and distribution Administration

() 392 000 196 000 98 000

(hours)

(15 marks) CIMA Cost Accounting 1

AN INTRODUCTION TO COST TERMS AND CONCEPTS