Cost: Resources sacrifice to achieve the cost object – cost incurred to acquire resource/benefit

Expense: Cost incurred to conduct the operating activities of the business

Cost Objects: Cost object is anything in respect of which a separate measurement of cost is
desirable. There are several purposes of cost accumulation. Keeping in view the objectives of
cost accumulation, the objects for which costs are computed are to be identified. These are
known as cost objects.

Cost Unit: The terminology of CIMA defines cost unit as “a quantitative unit of product or
service in relation to which costs are ascertained”. It refers to a unit of product or service or
time or combination of these which are to be used for the purpose of ascertainment of cost
through the process of allocation, apportionment or absorption. The definition of cost unit
varies from industry to industry. The forms of measurement are the units of physical
measurements such as weight, number, value, time, length and weight.

Cost Centre: Costs are to be ascertained by cost centre or cost unit or by both. To control costs
effectively, the factory has to be divided into a number of departments. It will be not only
unwieldy, but it loses its essence and effectiveness if whole factory is treated as a single unit.
Hence subdivision of factory into a number of departments is essential. Further, these
departments can be subdivided into various cost centres based on their activities. Costs
collected such centre-wise may be compared with standards, budgets or estimates for the
purpose of control and fixing responsibility.

Examples of cost centres: work office, quality control department, sales office, milling
machines.

Direct costs: Direct costs are those which are incurred for a particular cost unit, and can be
conveniently linked with that particular cost unit. Direct costs are those incurred primarily for,
and which can be identified as part of the cost of a given product. Costs which can be directly
identifiable with cost centres, processes or production units are known as direct costs.

Indirect costs: If costs cannot be identifiable with cost centres or cost units, they are termed
as “indirect costs”. Such costs that cannot be easily identifiable with cost centres have to be
apportioned on some equitable basis. These terms should be understood properly, as the same
will be applied in case of materials, labour and wages.

Overheads: Overheads include the cost of indirect material, indirect labour and indirect
expenses. Overheads may be classified into (i) production or manufacturing overheads, (ii)
administrative overheads), (iii) selling overheads and (iv) distribution overheads.

Manufacturing Costs: These refer to the costs of operating the manufacturing division of an
undertaking i.e. these costs include the transformation of material into finished products
through the use of labour and factory facilities. This cost is also termed as “production cost” or
“factory cost”, which is the sum of direct material, direct labour, and factory overhead. In

1
manufacturing organizations, raw material costs and costs incurred in the conversion of raw
materials into finished products are called product cost or Inventoriable cost. For trading
organizations, the cost of goods purchased, and expenses incurred in bringing them to their
existing location and in saleable condition are product costs. Product cost is a full factory cost.
This is shown as asset in the balance sheet till they are sold off. Product costs are included in
the cost of the product. It will not affect the income till it is sold.

Prime cost: Prime cost is the aggregate of direct material cost, direct wages and direct
expenses.

Conversion cost: Conversion cost is the aggregate of direct wages and factory overhead. It is
the cost incurred in the factory for the conversion of raw materials into finished goods. 3.

Period costs: Period costs are incurred on the basis of time like rent and salaries. Period costs
include selling and distribution costs and administration costs. Since they are not directly
associated with the product, they are not assigned to the product. They are charged to the
period in which they are incurred and are to be treated as expenses. In this context, one has to
distinguish between expense and expenditure. Expense is nothing but expired cost or
expenditure. An organization incurs expenditure in order to acquire goods and services. The
same can be said to have expired when consumption takes place, meaning thereby that it has
given the intended benefit. Thus, the cost of acquisition of goods for re-sale is an expenditure.
But it becomes an expense when the goods are sold and is shown in the profit and loss account.

Variable Costs: A cost that changes in direct proportion to changes in the cost driver. A cost
that varies in total in direct proportion to changes in activity levels, a variable cost must be a
constant amount per unit. The cost of raw materials, wages, sales commission, use of machine
on rental basis are the good examples of variable costs.

Fixed Cost: A cost that is not immediately affected by changes in the cost driver. Activities
that affect costs are often called cost driver. A fixed cost is that which tends to remain
unchanged despite often wide changes in output or activity. On a per unit basis, a fixed cost
varies inversely with changes in the level of activity. Sometimes called Committed Costs
because these costs cannot be eliminated instantly. These costs are incurred to maintain basic
facilities.

Example: Rent, rates, taxes, insurance.

Mixed Cost: A mixed cost is a semi-variable cost (sometimes known as a semi-fixed cost) that
has both a fixed and variable element to it. So a mixed cost has both a variable and a fixed

2
component. On a per unit basis, a mixed cost does not fluctuate in direct proportion with
changes in activity nor remains constant with changes in activity.

Relevant Range: A relevant range is said to be a band of activity (volume) in which a specific
form of budgeted sales and cost (expense) relationship will be valid. A fixed cost is regarded
as fixed only in relation to a given relevant range and a given time (budget period).

Cost classification is the process of grouping costs according to their common characteristics.
A suitable classification of costs is of vital importance in order to identify the cost with cost
centers or cost units.

Question 1

Book Worm Ltd is a publishing company that prints and sells a variety of books to

bookstores across the entire country. The amount of books printed each month and the total

printing costs are given below:

Month March April May June

Books Printed 7 400 8 000 5 000 6 800
Printing Cost R588 000 R652 000 R412 000 R 498 000

Required:

1.1.Use the high low method to separate the total printing costs into the variable and fixed
cost components.
1.2.What would the expected total printing costs be if 8 200 books were printed during the
month of July?

Question 2

The following data has been made available to you to help in terms of separating the mixed
costs into both the variable and fixed costs:
Periods Activities Costs

August 95 R8 355

September 100 R8 400

October 75 R8 175

November 125 R8 625

December 105 R8 445

3
Required:
Using simple regression analysis method calculate the following:
2.1. Variable rate per unit
2.2. Total fixed costs for the period

3. The term "conversion costs" refers to:

A. Manufacturing costs incurred to produce units of output.
B. All costs associated with manufacturing other than direct labour costs and raw material
costs.
C. Costs which are associated with marketing, shipping, warehousing, and billing
activities.
D. The sum of direct labour costs and all factory overhead costs.
E. The sum of raw material costs and direct labour costs.

4. The term "prime costs" refers to:

A. Manufacturing costs incurred to produce units of output.

B. All costs associated with manufacturing other than direct labour costs and raw
material costs.
C. Costs which are predetermined and should be attained.
D. The sum of direct labour costs and all factory overhead costs.
E. The sum of raw material costs and direct labour costs.

5. The term "variable costs" refers to:

A. All costs which are likely to respond to the amount of attention devoted to them by a
specified manager.
B. All costs which are associated with marketing, shipping, warehousing, and billing
activities.
C. All costs which do not change in total for a given period of time and relevant range
but which become progressively smaller on a per unit basis as volume increases.
D. All manufacturing costs incurred to produce units of output.
E. All costs which fluctuate in total in response to small changes in the rate of utilization
of capacity.

6. The term "cost" refers to:

A. An asset that has given benefit and is now expired.

B. The price of products sold or services rendered.
C. The value of the sacrifice made to acquire goods or services.
D. An asset that has not given benefit and is now expired.
E. The present value of future benefits.

4
7. Captain Ahab's shipbuilding company constructs huge sailing vessels. Captain Ahab's
accountant would consider the inexpensive stain used only on the wood of the captain's wheel
of a vessel to be:
A. A direct material.
B. A direct material as well as a prime cost.
C. A prime cost.
D. A conversion cost.

8. Complete the following sentences:

8.1.A __________ is a unit of product or service in relation to which costs are ascertained.
8.2. A __________ cost is an expenditure which can be economically identified with and
specifically measured in respect to a relevant cost object.
8.3. __________ cost is the total cost of direct material, direct labour and direct expenses.
8.4.An __________ or __________ cost is an expenditure on labour, materials or services
which cannot be economically identified with a specific saleable cost unit.
8.5.A cost __________ is a production or service location, function, activity or item of
equipment for which costs are accumulated.
8.6.A __________ cost is a cost which is incurred for an accounting period and which tends
to be unaffected by fluctuations in the levels of activity.
8.7.A __________ cost is a cost which changes in total in relation to the level of output.
8.8. An example of a fixed cost is __________.
8.9.An example of a variable cost is __________.
8.10. An example of a semi-fixed/semi-variable cost is __________.

9. Use the high–low and simple regression method to calculate the fixed and variable
elements of the following costs.
Period Units Cost
July 400 R1 000
August 500 R1 200
September 600 R1 400
October 700 R1 600
November 800 R1 800
December 900 R2 000

10. Which of the following are prime costs?

(i) Direct materials

(ii) Direct labour
(iii)Indirect labour
(iv) Indirect expenses

A (i) and (ii)

B (i) and (iii)
C (ii) and (iii)
D (ii) and (iv)

11.Which of the following could not be classified as a cost unit?

A Ream of paper

5
B Barrel of beer
C Chargeable man-hour
D Hospital

12.Which of the following would not be classified as a cost centre in a hotel?

A Restaurant
B Rooms
C Bar
D Meals served

13. Variable cost per unit:

A. Remains fixed
B. Fluctuates with the volume of production
C. Varies in proportion to volume of sales
D. Varies with budget

14. Fixed cost per unit increases when:

A. Production volume decreases

B. Production volume increases
C. Variable cost per unit decreases
D. Variable cost per unit increases

15. Fixed cost …………………… in the same proportion in which output changes.
A. Does not change
B. Changes
C. Increases
D. None of these.

16. Cost of production is equal to ……………………

A. Prime cost-plus Administration Overheads
B. Prime cost-plus non-manufacturing cost
C. Prime cost-plus manufacturing overheads
D. Works overhead plus administration overheads

17. Variable cost in total increases with ………….in output.

A. Increase
B. Decrease
C. None of these.

18.……………costs are partly fixed and partly variable in relation to output.

A. Variable
B. Fixed
C. Mixed
D. both a & b
6
 19. Variable costs change ……………………with change in output.
A. Proportionately
B. Inversely
C. Disproportionately
D. Sometimes

20. Which of these is not an objective of Cost Accounting?

A. Ascertainment of Cost
B. Determination of Selling Price
C. Cost Control and Cost reduction
D. Assisting Shareholders in decision making

21. Cost Unit is defined as:

A. Unit of quantity of product, service or time in relation to which costs may be ascertained
or expressed
B. A location, person or an item of equipment or a group of these for which costs are
ascertained and used for cost control.
C. Centres having the responsibility of generating and maximising profits
D. Centres concerned with earning an adequate return on investment

22. Fixed cost is a cost:

A. Which changes in total in proportion to changes in output

B. Which is partly fixed and partly variable in relation to output
C. Which do not change in total during a given period despise changes in output
D. Which remains same for each unit of output

23. Element/s of Cost of a product are:

A. Material only
B. Labour only
C. Expenses only
D. Material, Labour and expenses

24. Calculate the prime cost from the following information:

Direct material: R90 000
Direct labour: R60 000
Direct expenses: R20 000
Manufacturing overheads: R30 000

A. R180 000
B. R200 000
C. R150 000
D. R210 000

25. Calculate the conversion cost from the following information:

Direct material: R90 000
Direct labour: R60 000
Direct expenses: R20 000

7
 Manufacturing overheads: R30 000

A. R180 000
B. R90 000
C. R150 000
D. R210 000

26. Calculate the manufacturing cost from the following information:

Direct material: R90 000
Direct labour: R60 000
Direct expenses: R20 000
Manufacturing overheads: R30 000

A. R180 000
B. R200 000
C. R150 000
D. R210 000