COST CLASSIFICATION 2 PART

Answers

TASK №1: DEFINITIONS

1. The distinction between production and non-production costs is the basis of valuing
inventory.
2. A responsibility centre is a department or organisational function whose performance is
the direct responsibility of a specific manager.
3. Profit centres are similar to cost centres but are accountable for costs and revenues.
4. An investment centre is a profit centre with additional responsibilities for capital
investment and possibly for financing, and whose performance is measured by its return
on investment.
5. The basic principle of cost behaviour is that as the level of activity rises, costs will
usually rise.

6. -assist the communication of precise information

-reduce clerical work. For example the code 13422 would replace the title 'selling expense-
Eastern Division travel', thus simplifying communication and improving accuracy

-facilitate electronic data processing. Computer analysis, summarisation and presentation of data
can be performed more easily through the medium of codes

-facilitate a logical and systematic arrangement of costing records i.e. accounts

can be arranged in blocks of codes permitting additional codes to be inserted in logical order

-simplify comparison of totals of similar expenses rather than all the individual items. This
facilitates control
-incorporate check codes within the main code to check the accuracy of posting

7. Production costs are costs identified with a finished product. Such costs are initially
identified as part of the value of inventory. They become expenses only when the
inventory is sold.
8. Non-production costs are costs that are deducted as expenses during the current period
without ever being included in the value of inventory held.

TASK № 2: TRUE/FALSE

1. B
2. A
3. A
4. B
5. B
6. A
 TASK № 3: FOUNDATION LEVEL QUESTIONS

1. A The factory manager does not appear to have responsibility for revenues (or profits)
since all output is transferred to a processing centre. The manager is also not responsible for
capital investment. The factory is therefore likely to be a cost centre.

2. C Weekly cost reports are likely to be too frequent to be useful – especially since many
costs such as salaries and rent are incurred on a monthly basis. Monthly cost reporting is the
most probable frequency.

3. B

4. D The manager of a profit centre usually has control over how revenue is raised, ie selling
prices (item (i)) and over the controllable costs incurred in the centre (item (ii)).
Apportioned head office costs (item (iii)) are uncontrollable from the point of view of the profit
centre manager. A responsibility centre manager does not have control over the capital
investment in the centre (item (iv)) unless the centre is designated an investment centre.
5. C Controllable costs are items of expenditure which can be directly influenced by a given
manager within a given time span.
6. D It would be appropriate to use the cost per customer account and the cost per cheque
received and processed for control purposes. Therefore items (ii) and (iii) are suitable cost
units. Stationery costs, item (i), is an expense of the department, therefore it is not a suitable
cost unit.
7. A A period cost is charged against the sales for the period. It is not carried forward in
inventory to a future period.
8. C The supervisors are engaged 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.

TASK № 4: INTERMEDIATE LEVEL QUESTIONS

1. B A function or location for which costs are ascertained. A cost centre acts as a 'collecting
place' for costs before they are analysed further.
2. A For (10) machining department use of (410) indirect materials the code is 10410.
Option B has an incorrect expense type.
Options C and D have the incorrect cost centre code. The code indicates the cost centre
incurring the cost, ie receiving the materials.

3. C
C is the correct answer because a manager is not a cost object but may be linked to a cost
centre in a responsibility accounting system.

4. B
Answers A, C and D are incorrect, leaving B as the only possible answer. Depreciation of
fixtures is an overhead cost, and could be production, administration or selling and
distribution overheads, depending on the nature of the fixtures.
5. D
The cost of the ingredients is a direct material cost.

6. C
The inventory valuation will be unchanged. Finished goods are valued at the total production
cost and the rent of the warehouse would be classed as a distribution cost
7. C
Item B describes the costs of an activity or cost centre. Item A describes cost units. Item D
describes budget centres. A cost centre is defined as ‘a production or service location, function,
activity or item of equipment for which costs are accumulated’.
TASK № 5: ADVANCED LEVEL QUESTIONS

1.

Division Cost centre Profit centre Investment centre

Car sales 

Motorbike sales 

Manufacturing 

Finishing 

2. B
Inventory is valued at full production cost which includes direct material, direct labour and
production overheads.

3.

Cost Code

Salary of trainee IT consultant B100

Planning costs to renew lease of the office C200

Wages of the office manager B200

Cleaning materials used by cleaner A200

4. A
5. C Depreciation expense is a function of investment in non-current assets which would not
be controllable by a profit centre manager.
6. A
7. A