Cost and Management Accounting chapter 2 solutions #ManagementAccounting

1. (a) Variable cost in total changes in relation to changes in volume, e.g. direct material and commission.
(b) Fixed cost in total remains constant when volume changes within the relevant range, e.g. rent,
depreciation.
(c) Different costs react differently when volume or activity changes.
(d) High-low method, scatter graph and the least squares method.
(e) This is the activity range wherein the assumption regarding cost behaviour is valid.
Question 2.1
Q2.1 Page 1 of 15

2. (a) MONTH UNITS COST
August 1,025 R1,050
June 750 R775
Difference 275 R275
Variable cost per unit R1.000
August:
Total cost R1,050
Total variable cost R1,025
Total fixed cost R25
June:
Total cost R775
Total variable cost R750
Total fixed cost R25
Units produced: 600
Total variable cost R600
Total fixed cost R25
Total cost R625
(b) Units produced: 1,000
Total variable cost R1,000
Total fixed cost R25
Total cost R1,025
Question 2.2
Q2.2 Page 2 of 15

3. a. C
b. B
c. B
d. A
e. B
Explanations:
a. Answers A and B describe the cost of specific cost units, and answer D describes a specific cost
unit. They are not general definitions of a cost unit.
b. Answer A describes total production cost. Answer C is only a part of prime cost. Answer D is an
overhead cost.
c. The total amount of fixed costs remains unchanged when production volume changes, therefore the
unit rate fluctuates.
d. OBSERVATIONS CONSULTATIONS COST
High 5,750 R289,125
Low 4,500 R269,750
Difference 1,250 R19,375
Variable cost per unit R15.500
With the same amount of fixed overheads at both activity levels, the change in overheads must be
due to extra variable cost.
e. The graph shows a variable cost which starts to be incurred only beyond a certain volume of output.
Only B fits this description of cost behaviour.
Question 2.3
Q2.3 Page 3 of 15

4. a. A and D
b. See below
c. See below
d. See below
e. See below
Explanations:
a. Machine rental cost is a stepped fixed cost. For one machine the total rental cost stays constant until
the machine is working at full capacity. Then two machines will be needed and the rental cost goes up
a step to a new higher level. When the two machines are at full capacity there will be a need to rent
three machines, and so on.
Depreciation on delivery vehicles is a stepped fixed cost. Depreciation is calculated on an annual basis
and is unlikely to be affected by the level of activity in the short term. For one vehicle the annual
depreciation is a constant amount. If two vehicles are required the depreciation cost goes up a step,
and so on.
Royalty costs and direct material costs are variable costs.
b. As activity increases within the relevant range, the total variable costs will increase. The variable cost
per unit will remain the same and the fixed cost per unit will decrease.
Question 2.4
Q2.4 Page 4 of 15

5. c. Variable cost per unit R2.000
Units produced 3,000
Total variable cost R6,000
Total fixed cost R4,000
Total cost R10,000
d. Suitable as cost centre Suitable as cost unit
Restaurant X
Guest night X
Meal served X
Fitness suite X
Bar X
e. The period fixed cost is approximately R150. Variable cost per unit is:
Total cost R500
Fixed cost R150
Difference R350
Units produced 200
Variable cost per unit R1.750
Q2.4 Page 5 of 15

6. When you are trying to determine whether a cost is direct or indirect, think about
whether the cost would need to be shared over several cost units or whether it can be
attributed directly to a particular unit. A cost that needs to be shared must be an
indirect cost.
ITEM CLASSIFICATION
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20 (v)
(iv)
(iv)
(vi)
(ii)
(vii)
(vii)
(vi)
(vi)
(vi)
(iii)
(i)
(iv)
(vi)
(iv)
(viii)
Question 2.5
(vii)
(vii)
(vii)
(iv)
Q2.5 Page 6 of 15

7. Cost of direct material
+ Cost of direct labour
+ Factory overheads
Direct material opening inventory
+ purchases
+ Import duties or any other cost to deliver material in storeroom
– direct material closing inventory
Wages paid
– wages owing at beginning of period
+ wages owing at end of period
Question 2.6
Question 2.7
Question 2.8
Q2.6 - 2.8 Page 7 of 15

8. (a) - ©
Indirect labour costs
Y
R4 000
B
R3 000 D
R2 000
Variable cost
R1 000
A
E
Fixed cost
0
Production units
Line AB is the line of best fit (total cost line)
Line AC is the fixed cost line (R800 per month).
600 800 1 000 1 200 1 400
Question 2.9
C
X
200 400
Q2.9 Page 8 of 15

9. The amount of the fixed cost is the distance between line OX and line AC = R800
The variable cost is the distance between line AC and line AB.
The variable cost rate (variable cost per unit) is the gradient (slope) of line AB.
The gradient of line AB is calculated as follows:
Choose any point on the diagram (for example, point E). From this point draw a vertical line to AB.
The gradient can now be computed as follows:
Vertical distance (change in cost)
Horizontal distance (change in production)
DE (R2 500 - R800)
AE (1 000 -0)
= R1.700 (variable cost per unit)
(d) Variable cost R3,400
Fixed cost R800
Total cost R4,200
Units produced 2,000
=
Q2.9 Page 9 of 15

10. (a) and (b)
Y
220
200 D B
180
160
140
120
100
80 A
60 E
40
20
0 2 4 6 8 10 12 14 16 18 20 22 24 26
Production units
Line AB is the line of best fit (total cost line)
Line AC is the fixed cost line
Question 2.10
C
X
Semi-VariableCosts(R)
Q2.10 Page 10 of 15

11. (c) The amount of the fixed cost is the distance between line OX and line AC = R60
The variable cost is the distance between line AC and line AB.
The variable cost rate (variable cost per unit) is the gradient (slope) of line AB.
The gradient of line AB is calculated as follows:
Choose any point on the diagram (for example, point E). From this point draw a vertical line to AB.
The gradient can now be computed as follows:
Vertical distance (change in cost)
Horizontal distance (change in production)
DE (R190 - R60)
AE (25 -0)
= R5,20 (variable cost per unit)
=
Q2.10 Page 11 of 15

12. OBSERVATIONS UNITS COST
High 1,310 R4,995
Low 900 R3,560
Difference 410 R1,435
Variable cost per unit R3.500
June:
Total cost R4,995
Total variable cost R4,585
Total fixed cost R410
March:
Total cost R3,560
Total variable cost R3,150
Total fixed cost R410
Question 2.11
Q2.11 Page 12 of 15

13. 2.12.1 C
2.12.2 B
2.12.3 D
2.12.4 D
2.12.5 A
2.12.6 C
2.12.7 B
2.12.8 A
2.12.9 B
2.12.10 D
2.12.11 A
2.12.12 D
2.12.13 B
Calculations:
2.12.6 Variable cost per unit R3.500
Units produced 17,000
Total cost @ 17 000 units R246,500
Total variable cost R59,500
Total fixed cost R187,000
Question 2.12
Q2.12 Page 13 of 15

14. 2.12.8 OBSERVATION SQ METRES COST
High 15,100 R83,585
Low 12,750 R73,950
Difference 2,350 R9,635
Variable cost per unit R4.100
High:
Total cost R83,585
Total variable cost R61,910
Total fixed cost R21,675
Low:
Total cost R73,950
Total variable cost R52,275
Total fixed cost R21,675
Square metres: 16,200
Total variable cost R66,420
Total fixed cost R21,675
Total cost R88,095
Q2.12 Page 14 of 15

15. Question 2.