Questions on Costing 11-20

1. What is conversion cost
Direct labour and overhead are called conversion cost

2. What is Prime Cost
Direct material and direct labour are referred to as prime cost

3. Define Variable cost
Variable costs are expenses that change in proportion to the activity of a business

4. Define Direct cost
Direct Costs, however, are costs that can easily be associated with a particular cost object

5. Are all variable cost classified as direct cost?
Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.

6. What is contribution margin
- Contribution margin is the marginal profit per unit sale.
- Contribution margin analysis is a measure of operating leverage: it measures how growth in sales translates to growth in profits.
- High contribution margins are prevalent in labour-intensive tertiary sector
- Low contribution margins are prevalent in capital-intensive industrial sector.

7. What is CVP analysis?
Cost-Volume-profit(CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.

8. What are the assumptions used in CVP analysis
- The behaviour of both costs and revenues is linear throughout the relevant range of activity.
- Costs can be classified accurately as either fixed or variable.
- Changes in activity are the only factors that affect costs.
- All units produced are sold ie there is no finished goods inventory
- When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.

9. What is break –even point.
In Cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain.

Break even point (for output) = fixed cost / contribution per unit
Contribution (per unit) = selling price (per unit) - variable cost (per unit)
Break even point (for sales) = fixed cost / contribution (per unit) * selling price (per unit)

10.Define Margin of safety
Margin of safety represents the strength of the business. It enables a business to know what is the exact amount he/ she has gained or lost and whether they are over or below the break even point.

The actual sales minus break even sales gives the margin of safety.

Questions on Costing 1- 1o

1. Define Product Costs.
Product cost includes all costs that are required to make a product. Product costs are Direct Material, Direct Labor, Manufacturing Overhead costs. Its included as part of inventory and shown on the balance sheet until the product is sold. Product costs are often called “inventoriable costs” or “manufacturing costs”.

2. Define Period Costs.
Period cost includes Selling and Administrative costs. These costs are reported on the income statement as they are incurred. Not part of manufacturing overhead, not related to making the product.

3. Give few examples of period cost
Any cost at corporate headquaters, anything related to selling the product, shipping costs, administrative salaries, executive salaries, administrative office expenses, sales commissions, advertising, research and development, etc. Warehouse costs and people who move inventory are period costs

4. Define Selling Costs
All cost associated with marketing the finished products and getting the product to the customer

5. Define Administrative Costs
Costs incurred for the general administration of the organization

6. Define Direct Materials
Raw materials that become a part of the finished product

7. Explain Manufacturing Overhead
All costs of manufacturing the product except direct materials and direct labor. Costs associated with operating the factory that makes the product. If the cost has the word “factory”, “plant”, “manufacturing”, as a descriptive word, the cost will be part of manufacturing overhead.

8. Give few examples of manufacturing overhead costs
Utilities at the plant such as electricity, water, phone. Support personnel at the plant such as an accountant, human resources or computer support. Training, maintenance and repairs, rent, insurance, taxes, etc.

Hint – it has to happen at the manufacturing facility.
Indirect labor and indirect material are part of manufacturing overhead.

9. Define Indirect labor
Labor involved in making the product at the plant but do not touch the product to make it. example: salaries of the plant managers, supervisors, and quality inspectors

10. Define Indirect Materials
Low cost materials that end up in the product or are used to make the product. Examples are glue, tape, screw, marking pens, etc. It is not easy to track exactly how much is used to make one product.If the cost of a particular material cannot be easily traced to one product, it is an indirect material and is part of manufacturing overhead. Examples of indirect materials are cheap screws, tape, glue.