COST AND MANAGEMENT ACCOUNTING 2B

CMA02B2/BSR2B01/FNM02B2

UNIT 2: Cost classification, behaviour and

estimation
Question Bank

MULTIPLE CHOICE SOLUTIONS

1. D
2. C
3. A Cost of model 206 R700
Cost of model 204 650
Differential cost (R700 − R650) R50
4. D
5. A Conversion cost (a) R500
Offer price (b) 650
Company is better off by (b – a) R150
6. B
7. D
8. A Variable cost to produce 1 R10
unit (a)
Fixed cost (b) 10,000
Total cost (a + b) R10,010
9. A Fixed cost (A) R10,000
Variable cost (B) (1,000 Units × R10) 10,000
Total cost at 1000 units (A + B) R20,000
10. C Direct labour (a) R400,000
Manufacturing overhead:
Variable (b) 80,000
Fixed (c) 50,000
Conversion cost (a + b + c) R530,000
11. A
12. B Variable cost per unit
(R60,000/40,000 units) R1.50
 Variable cost of 50,000 units
(a) 75,000
(R1.50 × 50,000 units)
Fixed cost (b) 40,000
Total expected cost (a + b) R115,000
Expected cost per unit R2.30
(R115,000/50,000 units)
13. B
14. C
15. B
16. C
17. B
18. B
19. B
20. A
21. A
22. C
23. B
24. B
25. D Activity
Maintenance
level in
cost
units
Year 1 (A) 8,000 R12,000
Year 2 (B) 12,000 15,000
Difference
4,000 R3,000
(B − A)
Variable cost (R3,000/4,000 units) = R0.75
Fixed cost = R6,000
Cost formula for maintenance = R6,000 + R0.75 per unit

26. B
27. A
28. A Operating
Units sold
expenses
This Year
250,000 R222,000
(a)
Last Year
200,000 210,000
(b)
Difference
50,000 R12,000
(a – b)
Variable operating expenses (R12,000/50,000 units) = R0.24

29. C
30. C
31. C
32. A
33. D
SHORT QUESTIONS
Question 1
The three major elements of product costs in a manufacturing company are direct materials, direct
labour, and manufacturing overhead.
Question 2
A product cost is any cost involved in the purchase or the manufacture of goods. In the case of
manufactured goods, these costs consist of direct materials, direct labour, and manufacturing
overhead. A period cost is a cost that is taken directly to the statement of operating profit and loss
account as an expense in the period in which it is incurred.
Question 3
Yes, costs such as salaries and depreciation can end up as assets on the balance sheet if these are
manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are
sold. Thus, such costs may be part of either Work in Process inventory or Finished Goods
inventory at the end of a period if there are unsold units.
Question 4
Cost behaviour refers to how a cost will react or respond to changes in the level of business activity.
Question 5
A differential cost is a cost that differs between alternatives in a decision. An opportunity cost is
the potential benefit that is given up when one alternative is selected over another. A sunk cost is
a cost that has already been incurred and cannot be altered by any decision taken now or in the
future.
LONG QUESTIONS
QUESTION 1 (10 marks)

Direct Indirect Fixed Variable Mixed

a) X X (1)
b) X X (1)
c) X X (1)
d) X X (1)
e) X X (1)
f) X X (1)
g) X X (1)
h) X X (1)
i) X X (1)
j) X X (1)

If all columns are not in agreement no mark awarded

QUESTION 2 (10 marks)

a) Use high/low method to divide the cost into fixed and variable. Jan and Jun cannot be
used, because less than 100 units were produced and there is an added fixed cost.
Highest: Apr 300 360 000
Lowest: Feb 100 150 000
Difference 200 210 000 (1)
Variable cost per unit: 210 000/200 = R 1 050 (1)P
Fixed cost: 150 000 - (100 * 1 050) = R45 000 (1)CE

Cost formula: y = 45 000 + 1 050x (1)CE

b)
Normal VC increases with each additional unit produced.  Step VC increases only when there is
a fairly wide change in activity. 

For example, labour cost of maintenance workers/hire maintenance workers to service our
machines. We will only hire additional maintenance workers when there is a large increase in
activity. So, this cost does increase as production increases, but only when production increases
significantly.

c)
1.Step variable costs can be adjusted quickly as conditions change 
2.The width of steps is much narrower for step variable costs 

QUESTION 3 (8 marks)

Direct cost Indirect cost Variable Fixed

3.1 D V (1)
3.2 D F (1)
3.3 I V (1)
3.4 D V (1)
3.5 I F (1)
3.6 D F (1)
3.7 D F (1)
3.8 D V (1)

[16 x ½ = 8]

QUESTION 4 (15 marks)

4.1 Categorise all cost correctly using the following table:

Cost Direct Indirect Fixed Variable Mixed

Yeast x X 
Flour X X 
Depreciation X X 
Factory X X 
Utilities
Maintenance X x 
supplies for
factory

OR ½ mark each

4.2 Analyse any mixed cost identified using the high-low method.

Cost Units
High 140 000 80 000 
Low 80 000 40 000 
Change 60 000 40 000

Variable cost:
Change in cost/change in units
60 000P / 40 000P
= 1.50
 Fixed cost:
Y = a + b(x)
140 000 = a + 80 000 (1.50) P OR 2 marks for answer
a = 20 000

Cost formula: Y = 20 000 P + 1.50(x) P

MAX (7)

4.3 Explain the effect of a change in activity on both total variable cost and per
unit variable cost as well as on fixed cost per unit.

Unit variable cost will remain constant as volume increases. Total variable cost will
increase as volume increases.  Fixed cost per unit will decrease as the activity
increases (3)

QUESTION 5 (10 marks)

5.1 Fixed 
Variable 
Semi-fixed / Step 

5.2 39 000 = (x + 1 750 + 1 000)  + (x + 1 500 + 1 000)  + (x + 1 000)  + (x

+ 750) 
x = 8 000

Alternative:
Salaries 39 000
2 people sold more than 5 water filters 2 000 
37 000
20 water filters x 2 500 x 10% 5 000 
Basic salary 32 000  ÷ 4 = 8 000 

5.3 10 water filters = 8 000 P + (2 500 x 10 x 10%) 2 500 P + 1 000 = 11 500

QUESTION 6 (15 marks)

6.1 Total variable cost will increase/decrease when activity increases/decreases,  while
per unit variable cost will remain constant. 
Total fixed cost will remain constant when activity increases/decreases within a
relevant range,  while fixed cost expressed on a per unit basis will increase/decrease
as activity increases/decreases. (4)

6.2
@ 75 000 hours
Indirect materials 7 500 000 5 000 000/50 000=100*75 000 
Rent 6 000 000 
Maintenance 4 125 000 P (balancing figure)
Total 17 625 000

(3)
6.3 Total factory overhead will amount to R16 950 000 P at an operating level of 70
000 hours. This total will consist of: R7 000 000  for indirect materials, as indirect
materials are variable and amounts to R100 per hour; R6 000 000  for rent, as rent
is fixed and will remain constant; and, R3 950 000 P for maintenance , as
maintenance is a mixed cost consisting of a fixed cost of R1 500 000  and a variable
cost of R35  per hour. PLUS 2 marks for discussion

Thus, when marking this question allocate 6 marks to the figures within the
discussion AND 2 marks for the discussion itself (6 marks for calc + 2 for
discussion)

Calculations:
@70 000 hours
Indirect materials 7 000 000 P=100*70 000
Rent 6 000 000 
Maintenance 3 950 000 P=1 500 000 + (35*70 000)
Total 16 950 000 P

High: 4 125 000 75 000

Low: 3 250 000 50 000
875 000 25 000

Variable portion = 875 000/25 000 = R35 per hour

Fixed portion = 4 125 000 – (75 000*35) = R1 500 000

Alternative calculation:

High: 17 625 000 75 000

Low: 14 250 000 50 000
3 375 000 25 000

Variable portion = 3 375 000/25 000 = R135 per hour 

Fixed portion = 17 625 000 – (75 000*135) = R7 500 000 

Y = 7 500 000 + (135 x 70 000) = 16 950 000 

BASIC

Question 7

a)

Sales R150 000

Less variable expenses:
Cost of goods sold (R450  200 pairs*) R90 000
Selling expenses (R50  200 pairs) 10 000
Administrative expenses (20%  R10,000) 2 000 102 000
Contribution margin 48 000
Less fixed expenses:
Selling expenses [R30,000 – (R50 x 200 pairs)] 20 000
Administrative expenses (80% x R10,000) 8 000 28 000
Operating profit R 20 000

*R150 000 sales  R750 = 200 pairs.

b) Since 200 pairs of skis were sold and the contribution margin totaled R48 000 for the
quarter, the contribution of each pair of skis toward covering fixed costs and toward
earning of profits was R240 (R48 000 ÷ 200 pairs = R240).

Question 8

a)
Cost of goods sold Variable
Advertising expense Fixed
Shipping expense Mixed
Salaries and commissions Mixed
Insurance expense Fixed
Depreciation expense Fixed

2
b)

Analysis of the mixed expenses:

Shipping Salaries and
Units Expense Comm. Expense
High level of activity 5 000 R 38 000 R 90 000
Low level of activity 4 000 34 000 78 000
Change 1 000 R 4 000 R 12 000

Variable cost element:

Change in cost = Variable rate

Change in activity

Shipping expense : R4 000 = R 4 per unit

1 000 units

Salaries and Comm. Expense : R12 000 = R 12 per unit

1 000 units

Fixed cost element:

Shipping Salaries and
Expense Comm. Expense
Cost at high level of activity R 38 000 R 90 000
Less variable cost element:
5,000 units  R 4 20 000
5,000 units  R 12 60 000
Fixed cost element R 18 000 R 30 000

The cost formulas are:

Shipping expense: R 18,000 per month plus R 4 per unit or Y = R 18 000 + R 4X.

Salaries and Comm. expense: R 30 000 per month plus R 12 per unit or Y = R 30 000 +
R 12X.

3
c)
Motsepe and Zwane Ltd.
Profit and loss Statement
For the Month Ended September 30
Sales in units 5 000
Sales revenue (@R 100) R 500 000
Less variable expenses:
Cost of goods sold (@R 60) R 300 000
Shipping expense (@ R 4) 20 000
Salaries and commissions expense
(@R 12) 60 000 380 000
Contribution margin 120 000
Less fixed expenses:
Advertising expense 21 000
Shipping expense 18 000
Salaries and commissions expense 30 000
Insurance expense 6 000
Depreciation expense 15 000 90 000
Operating profit R 30 000

Question 9

a)
March—Low June—High
6 000 Units 9 000 Units
Direct materials cost @ R6 R 36 000 R 54 000
Direct labour cost @ R10 60 000 90 000
Manufacturing overhead cost 78 000 * 102 000*
Total manufacturing costs 174 000 246 000
Add: Work in process, beginning 9 000 32 000
183 000 278 000
Deduct: Work in process, ending 15 000 21 000
Cost of goods manufactured R168 000 R257 000

*Computed by working upwards through the statements.

4
b)
Units Cost
Produced Observed
June—High level of activity 9 000 R102 000
March—Low level of activity 6 000 78 000
Change 3 000 R 24 000

Change in cost = R24 000 = R 8 per unit

Change in activity 3 000

Total cost at the high level of activity R102 000

Less variable cost element (R8  9 000 units) 72 000
Fixed cost element R 30 000

Therefore, the cost formula is:

R30 000 per month, plus R8 per unit produced or

Y = R30 000 + R8.00X.

5
c)

The cost of goods manufactured if 7 000 units are produced:

Direct materials cost (R6  7 000) R 42 000

Direct labour cost (R10  7 000) 70 000
Manufacturing overhead cost:
Fixed portion R30 000
Variable portion (R8  7 000) 56 000 86 000
Total manufacturing costs 198 000
Add: Work in process, beginning —
198 000
Deduct: Work in process, ending —
Cost of goods manufactured R198 000