2. Session 1
• Understand the meaning of different cost terms;
• Define and illustrate a cost object;
• Key terms or concepts
• Short term some costs and revenues are not relevant for decision-
making
• Purposes for which cost information is required
3. Cost classification
A company manufactures and retails clothing. You are required to group the
costs that are listed below into the following classifications
(i) direct materials
(ii) direct labour
(iii) direct expenses
(iv) indirect production overhead
(v) research and development costs
(vi) selling and distribution costs
(vii) administration costs
(viii) finance costs.
4. COSTS OF THE RETAILER
• Lubricant for sewing machines
• Floppy disks for general office computer
• Maintenance contract for general office photocopying machine
• Telephone rental plus metered calls
• Interest on bank overdraft;
• Performing Rights Society charge for music broadcast throughout the factory
• Market research undertaken prior to a new product launch
• Wages of security guards for factory
• Carriage on purchase of basic raw material
• Royalty payable on number of units of product XY produced
• Road fund licences for delivery vehicles
• Parcels sent to customers
• Cost of advertising products on television
• Audit fees
• Chief accountant’s salary
5. Classify each of the following
• Fixed (F), variable (V), semi-fixed (SF) or semi-variable (SV):
• (i) direct labour;
• (ii) depreciation of machinery;
• (iii) factory rental;
• (iv) supplies and other indirect materials;
• (v) advertising;
• (vi) maintenance of machinery;
• (vii) factory manager’s salary;
• (viii) supervisory personnel;
• (ix) royalty payments
6. Classify The costs on the basis of Behavior
• A company is considering selling an old machine. The machine has a book value of £ 20,000. In
evaluating the decision to sell the machine, the £20 000 is a ___________.
• As an alternative to the old machine, the company can rent a new one. It will cost £3000 a year.
In analyzing the cost-volume behavior the rental is a ___________.
• To run the firm’s machines, there are two alternative courses of action. One is to pay the
operators a base salary plus a small amount per unit produced. This makes the total cost of the
operators a ___________.
• As an alternative, the firm can pay the operators a flat salary. It would then use one machine
when volume is low, two when it expands, and three during peak periods. This means that the
total operator cost would now be a ___________.
• The machine mentioned in (1) could be sold for £8000. If the firm considers retaining and using
it, the £8000 is a ___________.
• 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 ___________.
• The machine is charged to the foreman of each department at a rate of £3000 a year. In
evaluating the foreman, the charge is a ___________
7. Intermediate: Sunk and opportunity costs for
Decision Making
• Mrs Johnston has taken out a lease on a shop for a down payment of
£5000. Additionally, the rent under the lease amounts to £5000 per
annum. If the lease is cancelled, the initial payment of £5000 is
forfeit. Mrs Johnston plans to use the shop for the sale of clothing,
and has estimated operations for the next 12 months as follows:
8. Intermediate: Sunk and opportunity costs for
Decision Making
• In the figures, no provision has been made for the cost of Mrs
Johnston but it is estimated that one-half of her time will be devoted
to the business. She is undecided whether to continue with her plans,
because she knows that she can sublet the shop to a friend for a
monthly rent of £550 if she does not use the shop herself. You are
required to: (i) explain and identify the ‘sunk’ and ‘opportunity’ costs
in the situation depicted above;
(ii) state what decision Mrs Johnston should make according to the
information given, supporting your conclusion with a financial
statement;
9. Intermediate: Analysis of costs by behaviour
for decision-making
• The Northshire Hospital Trust operates two types of specialist X-ray
scanning machine, XR1 and XR50. Details for the next period are
estimated as follows:
10. • A brain scan is normally carried out on machine type XR1: this task uses
special X-ray plates costing £40 each and takes four hours of machine time.
Because of the nature of the process, around 10 per cent of the scans
produce blurred and therefore useless results. Required:
• (a) Calculate the cost of a satisfactory brain scan on machine type XR1.
• (b) Brain scans can also be done on machine type XR50 and would take
only 1.8 hours per scan with a reduced reject rate of 6 percent. However,
the cost of the X-ray plates would be £55 per scan.
• Required: Advise which type should be used, assuming sufficient capacity is
available on both types of mac, takinghine.
