Test Your Knowledge/Questions On Costs Classification or Cost Concept

1 Classify each of the following as being fixed(F), variable(V) or semi-variable(SV):

(a) direct labor;
(b) depreciation on machinery;
© factory rental;
(d) supplies and other indirect materials;
(e) advertising;
(f) maintenance of machinery;
(g) factory manager’s salary;
(h) supervisory personnel;
(i) royalty payments.


2 Which of the following costs are likely to be controllable by the head of the production department?

(a) price paid for materials;
(b) charge for floor space;
(c) raw materials used ;
(d) electricity used for machinery;
(e) machinery depreciation;
(f) direct labour;
(g) insurance on machinery;
(h) share of cost of industrial relations department.


3. For the relevant cost data in items (1) to (7), indicate which of the following is the best classification:

(a) sunk cost
(b) incremental cost
(c) variable cost
(d) fixed cost
(e) semi-variable cost
(f) semi-fixed cost
(g) controllable cost
(h) non-controllable cost
(i) opportunity cost


1) A company is considering selling an old machine. The machine has a book value of $15,000. In evaluating the decision to sell the machine, the $ 15,000 is a …..

2) As an alternative to the old machine, the company can rent a new one. It will cost $10,000 a year. Analysing the cost-volume behaviour the rental is…

3) To run the firm’s machines, there are 2 alternative courses of actions. One is to pay the operator a base salary plus a small amount per unit produced. This makes the total cost of the operator a…

4) As an alternative, the firm can pay the operator a flat salary. It would then use 1 machine when volume is low, 2 machines when it expands, and 3 during peak periods. This means that the total operator cost would now be a….

5) The machine mentioned in (1) could be sold for $11,000. If the firm considers retaining and using it, the $11,000 is a….

6) If the firm wishes to use the machine any longer, it must be repaired. For the decision to retain the machine, the repair cost is a …

7) The machine is charged to the foreman of each department at a rate of $13,000 a year. In evaluating the foreman, the charge is a …


4. A company manufactures and retails clothing. You are required to group the costs which are listed below and numbered (1) – 20) into the following classifications (each cost is intended to belong to only one classification);

(a) direct materials
(b) direct labor
(c) direct expenses
(d) indirect production overhead
(e) research and development costs
(f) selling and distribution costs
(g) administration costs
(h) finance costs

(1) Lubricant for sewing machines
(2) Floppy disks for general office computer
(3) Maintenance contract for general office photocopying machine
(4) Telephone rental plus metered calls
(5) Interest on bank overdraft
(6) Performing rights society charge for music broadcast throughout the factory
(7) Market research undertaken prior to a new product launch
(8) Wages of security guards for factory
(9) Carriage on purchase of basic raw materials
(10) Royalty payable n number of units of product XY produced
(11) Road licences for delivery vehicles
(12) Parcels sent to customers

Manufacturing Accounts

Test Your Knowledge on Manufacturing account:

1. Is the Manufacturing account an internal management account? If yes,what is the purpose of producing such report?
2. What types of cost are included in a manufacturing account?
3. What is "prime cost" What is factory cost?
4. What is the purpose of apportioning overheads?
5. What is a profit centre
   

Revision Note On Manufacturing Accounts

SALIENT POINTS on the topic of Manufacturing Accounts:

1.0 Manufacturing accounts are prepared for internal management purpose only. This report helps management to distinguish between the costs and profitability associated with the manufacturing operations and those associated with trading ( shown in the trading account)


2.0 In a manufacturing account, we have:

• PRIME COST= Cost of raw materials + direct labor employed in production

• FACTORY COST OF GOODS PRODUCED= Prime Cost+Indirect facoty expenses plus or minus any movement over the period in the cost of work in progress

• FACTORY PROFIT=a notional profit earned in the manufacturing operation, reflecting the relative cheapness of manufacturing goods compared with buying them from outsiders

• TRANSFER PRICE OF FINISHED GOODS PRODUCED=Factory Cost+ Factory Profit. This transfer price appears in the trading account as part of the cost of goods sold.

How To Prepare the Financial Statements For A Manufacturing Company

Append below are:

(a) The following financial statements for a manufacturing company:

• Statement of Cost Of Goods Manufactured
• Income Statement
• Balance Sheet

(b) Salient points to note in a manufacturing company:

There are three (3) types of inventories namely:

• Raw materials, work in progress and finished goods
• Remember that:

Cost of Goods Manufactured = Beginning Work in progress Plus Total current manufacturing cost( direct labor + factory overheads) Minus Ending work in progress

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FORMAT of Statement of Cost Of Goods Manufactured for year ended 31 st December 2008

	$		$
Opening work in progress			XXX
Direct material
Opening inventories	XXX
+ Purchases	XXX
Raw material available for use	XXX
-Closing inventories	(XX)
Raw material consumed/used		XXX
Direct labor		XXX
Factory overhead:
Indirect material	XX
Indirect labor	XX
Others	XX
Total factory overhead		XXX
			XXX
Less: Closing work in progress			(XXX)
Total current manufacturing cost			XXX

FORMAT of Income Statement for the year ended 31st Dec 2008

		$	$
Sales Revenue			XXXX
Less: Cost of Goods Sold
Beginning Finished Goods Inventory		XXX
Cost of Goods Manufactured		XXX
Cost of Goods Available for Sale		XXX
-Ending Finished Goods Inventory		(XXX)
Cost of Goods Sold			(XXX)
Gross Profit			XXXX
Less: Operating Expenses			XXXX
Selling Expenses			XXX
Administrative Expenses			XXX
Net Income/(loss)			XXX

Format of Balance Sheet As At 31 st December 2008 ( extracted only Current Asset portion )

		$	$
Current Assets
Cash			XXX
Accounts Receivable			XXX
Inventories:
Raw Materials		XX
Work in progress		XX
Finished goods		XX	XXX
Sundry deposits and prepayment			XXX
Total Current Assets			XXX