COST CLASSIFICATION

Cost = Expenses = Overheads

Direct Cost
A direct cost is expenditure, which can be economically identified with and specifically
measured in respect to a relevant cost ob
object.
Types of Direct Cost
1. Direct Material
2. Direct Labour
3. Direct Expenses

Indirect Cost
An Indirect cost (Overheads) is expenditure, which can not be economically identified
with a specified suitable cost.
Types of Indirect Cost
1. Indirect Material
2. Indirect Labour
3. Indirect Expenses

FFQA HELPING HAND

Indirect Costs are also known as Production Overhead and Factory Overheads

EXPENDITURE
Capital Expenditures Revenue Expenditures
Purchase of an Assets Expenses other than Capital
Expenses which Increase Expenses
Performance of Non Examples includes
Current Assets Payment of Fire Insurance
Expenses which Increase 1. Repairs
Life of Non Current Assets 2. Renewals
Non Routine Expenses 3. Salaries Expenses
4. Wages Expenses
5. Rent Expenses
6. Interest Expenses
7. Administration Expenses
8. Tax
And many more

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
0334
COST BEHAVIOUR
Fixed Cost is a cost incurred for an accounting period, that, within certain output or
turnover limits, tends o be unaffected by fluctuation in the level of activity
Examples
Rent , Rates , Insurance , executive salary
CIMA Terminology

Step Fixed Cost is a fixed cost which shot up after an optimum level

Variable Cost is a cost that varies with a measure of activity

CIMA Terminology

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Semi Variable Cost / Semi Fixed Cost / Mixed Cost is a cost
containing both fixed and variable components and thus partly affected by the change in
the level of activity
CIMA Terminology

Question # FFQA1
The following shows the cost per unit of an item of expense at different levels of activity:
Activity (units) Cost per unit (£)
1 10,000
50 200
100 120
150 80
What is the correct behavioural classification for the expense item?
A Fixed cost
B Semi-variable cost
C Stepped-fixed cost
D Variable cost

Question # FFQA2
Which of the following would be classified as a fixed cost in the operation of
a motor vehicle?
A Oil change every 10,000 kilometres
B Petrol
C Insurance
D Tyre replacement

Question # FFQA3
Which of the following would be regarded as a stepped-fixed cost in the
annual operation of a motor vehicle?
A Hire purchase payments
B Insurance
C Petrol
D Tyre replacement

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Question # FFQA4
The cost per unit of an expense item at different levels of activity is shown below:
Activity (units) Cost per unit ($)
200 12·00
300 8·00
400 7·00
500 5·60
What is the behavioural classification of the expense item?
A Fixed cost
B Semi-variable cost
C Stepped-fixed cost
D Variable cost

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
HIGH LOW METHOD
A mixed or semi-variable cost is one that is partly fixed and partly variable in behaviour.
An example would be power costs (gas or electricity, for instance) which consist of a
fixed charge irrespective of the number of units of power consumed and a variable
charge based on the number of units of power consumed.
For cost-volume-profit analysis the fixed and variable elements need to be separately
identified by using, for example, the high low method or linear regression. Each would
then be considered along with the other variable and other fixed costs in the analysiS

Step 1
Identify High Level and Low Level
Step 2
Difference
Step 3
Variable cost per Unit
Step 4
Using the equation
Total Cost = Total Variable Cost + Total Fixed Cost
Step 5
Use of Knowledge
Question # FFQA1
Production units and total costs relating to the last three periods have been:
Period 1 Period 2 Period 3
Production (units) 129,440 117,620 126,310
Total costs (£) 198,968 187,739 195,376
Using the high-low method, what is the estimated variable cost per unit of
production?
A £0·87 B £0·95 C £1·05 D £1·15

Question # FFQA2
The following data is available relating to costs and activity:
Total cost Activity
£28,420 11,600 units
£29,294 12,440 units
£29,764 12,880 units
Using the high-low method, what is the variable cost per unit (to the nearest
penny)?
A £0·95
B £1·04
C £1·05
D £1·07

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Question # FFQA3
Total production costs and output over three periods have been:
Period Production Costs Output
1 £230,485 12,610 units
2 £254,554 14,870 units
3 £248,755 14,350 units
What are the estimated variable production costs per unit if the high–low
method is applied?
A £10·50 B £10·65 C £11·15 D £15·50

Question # FFQA4
Production costs have been estimated at two levels of output:
50,000 units 55,000 units
Prime costs $430,000 $473,000
Overheads $330,000 $339,000
What are the estimated production costs per unit at an output level of
54,000 units?
A $14·76 B $14·84 C $15·20 D $17·00

Question # FFQA5
A particular cost is classified as ‘semi-variable’.
What effect would a 15% reduction in activity have on the unit cost?
A Increase by less than 15%
B Increase by 15%
C Reduce by less than 15%
D Remain constant

Question # FFQA6
The following information for advertising and sales has been established over the past
six months:
Month Sales Revenue Advertising expenditure
£’000 £’000
1 155 3
2 125 2·5
3 200 6
4 175 5·5
5 150 4·5
6 225 6·5
Using the high-low method which of the following is the correct equation
for linking advertising and sales from the above data?
A sales revenue = 62,500 + (25 x advertising expenditure)
B advertising expenditure = –2,500 + (0·04 x sales revenue)
C sales revenue = 95,000 + (20 x advertising expenditure)
Prepared by: Mohammad Faizan Farooq Qadri Attari
ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
COST OBJECT
A Cost object is anything for which costs can be ascertained.

COST UNIT
Defined by CIMA Official Terminology as
‘a unit of product or service in relation to which costs are ascertained’.
Examples include:
Operation (in a hospital) i.e the cost per operation is calculated
Barrel (in the brewing industry) i.e the cost per barrel is calculated

COST CENTRE
Defined by CIMA Official Terminology as ‘a production or service location, function,
activity or item of equipment for which cost
costs are accumulated,
Examples include:
Raw material preparation,
order processing department,

INVESTMENT CENTRE
An investment centre manager is responsible for profit but with additional
responsibility for capital investment: performance may be measured by return on
investment.

SERVICE CENTRE
A service centre is a department that does not directly produce units but is required to
support the other departments.
Examples include maintenance departments, stores or a canteen.

PRODUCTION CENTRE
A production centre is a centre where units are actually made, examples being a
machining department or a welding department.

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
0334
Question # FFQA1
Which of the following best describes a profit centre?
A Part of a business where management makes investment decisions
B Part of a business that provides a service to other parts of the business
C Part of a business where finished products are manufactured
D Part of a business where management is responsible for revenues and costs

Question # FFQA2
Which of the following best describes an investment centre?
A Part of a business that uses fixed assets
B Part of a business that provides a service for other parts of the business
C Part of a business where management is only responsible for investment costs
D Part of a business where management is responsible for capital investment as well as profit

Question # FFQA3
For which of the following is a profit centre manager normally responsible?
A Costs only
B Revenues only
C Costs and revenues
D Costs, revenues and investment

Question # FFQA4
Which of the following would NOT be classified as a service cost centre in a
manufacturing company?
A Product inspection department
B Materials handling department
C Maintenance department
D Stores

Question # FFQA5
Reginald is the manager of production department M in a factory which has ten other
production departments. He receives monthly information that compares planned and
actual expenditure for department M. After department M, all production goes into
other factory departments to be completed prior to being despatched to customers.
Decisions involving capital expenditure in department M are not taken by Reginald.
Which of the following describes Reginald’s role in department M?
A A cost centre manager
B An investment centre manager
C A profit centre manager
D A revenue centre manager

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Question # FFQA6
The following statements relate to responsibility centres:
(i) Return on capital employed is a suitable measure of performance in both
profit and investment centres.

(ii) Cost centres are found in manufacturing organisations but not in service
organisations.

(iii) The manager of a revenue centre is responsible for both sales and costs in a
part of an organisation.
Which of the statements, if any, is true?
A (i) only
B (ii) only
C (iii) only
D None of them

Question # FFQA7
The following statements relate to responsibility centres:
(i) The manager of a revenue centre is responsible for sales and costs in a
segment of an organisation.

(ii) Return on capital employed is a suitable measure of performance in a profit

centre.

(iii) Cost centres are found in manufacturing and service organisations.

Which of the statements, if any, is correct?
A (i) only
B (ii) only
C (iii) only
D None of them

Question # FFQA8
Which of the following should NOT be classified as a service cost centre in a
manufacturing organisation?
A Factory canteen
B Stores
C Materials handling department
D Final product inspection department

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
COST BOOK-KEEPING
DIRECT COSTS INDIRECT COST
Direct Material Indirect Material
Cash / Payable Cash / Payable

Work in Process Production Overheads

Direct Material Indirect Material

Finished Goods Work in Process

Work in Process Direct Material

Cost of Goods Sold Finished Goods

Finished Goods Work in Process

Cost of Goods Sold

Finished Goods

Question FFQA1
In a cost bookkeeping system what would be the entry for the absorption of
production overhead?
Debit Credit
A Cost Ledger Control Account Production Overhead Account
B Production Overhead Account Work-in-Progress Account
C Work-in-Progress Account Cost Ledger Control Account
D Work-in-Progress Account Production Overhead Account

Question FFQA2
When production has been completed what double-entry would be made in
a cost accounting system?
Debit Credit
A Cost of sales Finished goods
B Finished goods Work-in-progress
C Finished goods Cost of sales
D Work-in-progress Finished goods

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590
Question FFQA3
When goods are sold, what double-entry would be made to record the
transfer of costs?
Debit Credit
A Finished goods account Cost of sales account
B Sales account Cost of sales account
C Cost of sales account Sales account
D Cost of sales account Finished goods account

Question FFQA4
In a cost accounting system what would be the entry to record the
completion of production?
Debit Credit
A Cost of Sales Account Finished Goods Account
B Finished Goods Account Cost of Sales Account
C Finished Goods Account Work-in-Progress Account
D Work-in-Progress Account Finished Goods Account

Question FFQA5
In a cost bookkeeping system what would be the entry for the absorption of
production overhead?
Debit Credit
A Cost Ledger Control Account Production Overhead Account
B Production Overhead Account Work-in-Progress Account
C Work-in-Progress Account Cost Ledger Control Account
D Work-in-Progress Account Production Overhead Account

Prepared by: Mohammad Faizan Farooq Qadri Attari

ACCA (Finalist)
http://www.ffqacca.co.cc
Contact: faizanacca@yahoo.com
0334-3440590