Question 1
a. Explain the concept of “cost behaviour” and how it is used to classify costs. [5 marks]
Cost behavior is the behavior change in the total operating cost of an organization as a result of a
change in the levels of a specific activity. These costs may include direct materials, direct labor,
and overhead costs that are incurred from developing a product. Cost behaviour analysis break
down into three expense classifications: variable, fixed, and mixed costs. Though cost behaviour
can be used to analyze cost behaviours internally for any business, they work particularly well
for a business that manufactures products for resale, as they help to factor in behind-the-scenes
costs that affect the pricing.
b. Describe the classification of costs, giving appropriate examples. [9 marks]
Variable Costs
Variable costs change as the number of products produced changes. These costs vary with with
the units of output produced and initial starts at zero and rise as more output is produced. For
example a small business crocheting blankets if it needs to make more blankets, it must purchase
more yarn. In this instance, yarn represents a variable cost because its final total cost fluctuates
depending on many blankets produced. Because the business can easily control variable costs,
the owner can slow or stop blanket production to reduce expenses when it reaches the end of its
relevant range or the amount of blankets planned. However, the variable cost per unit remains
constant. Some variable costs include raw materials costs and labour costs.
Fixed Costs
Fixed costs are expenses that remain constant in total. Fixed costs include things such as rent,
insurance, salaries, and property taxes, which stay constant in the relative range. In some
instances, though, expanding the inventory can drive up these costs. For example, the small
crochet company has one warehouse to store its finished blankets, and the rent on the warehouse
costs $500 per month. By paying a fixed cost of $500 per month, it has the space to store a set
number of blankets. If it requires greater space, fixed cost of rent may increase. When the fixed
costs change at certain points, they are considered step costs.
Mixed Costs
Mixed costs refer to expenses that include both fixed and variable costs. Typically, mixed costs
arise when a business incurs a fixed flat charge plus an additional activity-based fee. These costs
contain both fixed and variable components and are therefore partly affected by changes in the
level of activity. For example the crochet company has a contract with a shipping company to
transport its blankets. For this service, it pays a fixed cost of $75 per month plus a variable cost
of $5 for every shipment sent, regardless of how many packages submitted for transport to
customers. Costs of running a car are mixed as fixed cost is road tax, insurance
, and variable costs include petrol, oil, repairs
c. The following data relates to production levels of a T-shirt manufacturing entity over a
four
month period.
Period Activity Level (units) Costs Incurred($)
January 2,400. 13,485
February 2,950 14,665
March. 3,451 15,659
April. 3,988 16,101
Using the High/Low method, compute and show the values of the different classes of costs.
Clearly show all workings. [6 marks]
High Level 3, 988 $16, 101
Low Level. 2, 400. $13, 485
1, 588. $ 2, 616
$2, 616 = $1, 65 per unity of Variable Cost
1, 588
Total Cost = Fixed Costs + Variable Costs
Total Variable Costs = $1, 65 × 3, 988
= $6, 580
Fixed Costs = $16, 101 - $6, 580
= $9, 521
d. Why is it important to study and understand cost behaviour? [5 marks]
By tracking variable, fixed, step, and mixed costs, one can get a clear picture of how costs
typically behave, which helps when it comes to figuring out per-unit pricing. Because by
measuring these costs internally and log them as expenses, it helps to build cost behaviour into
pricing standards behind the scenes. This ensures one to know how much is needed to make per
unit to break even and make a profit. Having this information on hand especially helps when the
decision to expand operations needs to be made.
Studying and having a clear understanding of cost behaviour is important for budget creation. If
someone is creating a budget, understanding the types of behavior certain costs have can help
them make budgetary predictions. Also, this is important in the analysis of cost-volume-profit.
Cost behavior also helps calculate cost-volume-profit (CVP), which is the analysis of how costs
and volume impact profit.
Managers use this in controlling costs for their organizations. Understanding how changes in
costs can impact the company can help managers control costs by making strategic financial
decisions from the beginning. To measure cost behaviour patterns, managers first need to track
and categorize expenses into classifications and then look for the relevant range, or the spot
where revenue and expenses balance exactly as expected.
Question 2
Siyafasonke Funeral Parlour operates a special unit that manuafactures low cost coffins for its
clientele. Each coffin costs $350 to manufacture and is sold for $412. On a monthly basis,
Siyafasonke incurs fixed costs of $900. During the month of October 2023, the parlour
manufactured and sold 20 coffins.
Showing all workings, calculate
a. The profit or loss made for the month of October 2023
Profit/Loss = Total Cost - Total Sales
Total Cost = $350(20) + $ 900
= $7, 940
Total Sales = $412 × 20
= $8, 240
Profit = $ 300
b. The break even point in units
Break-even point = Fixed costs / (Sales price – Variable costs per unit)
Break-even point = $900 / ($412 – $350)
Break-even point = 15 coffins
c. The breakeven point in revenue
d. The margin of safety
Margin of Safety = Current production - Breakeven point
= 20 - 15
= 5 coffins
e. The number of units to be sold to achieve a targeted profit of $2,000.
Graphically depict the breakeven point calculated in (b) and (c) above. [5 marks]
Explain the uses of the CVP analysis, giving examples from a retailer of your choice. [5
marks]
Cost-Volume-Profit (CVP) analysis is a management accounting technique that is used to
determine the relationship between the cost of producing a product, the volume of sales, and the
resulting profits. CVP analysis helps businesses to understand the financial impact of different
decisions and to make informed decisions that maximize profits.
Identifying fixed costs is important for several reasons. First, fixed costs are an important
component of CVP analysis, which helps businesses to understand the financial impact of
different decisions. Second, fixed costs can significantly impact a company’s profitability and
cash flow. Finally, fixed costs are important for budgeting and forecasting. Identifying fixed
costs is essential for understanding the store’s profitability and cash flow. The store can make
informed decisions about pricing, product mix, and resource allocation by understanding the
fixed costs. The store can also use fixed costs for budgeting and forecasting to ensure that it can
cover its expenses and generate a profit.
Question 3
Sable Lts is a manufacturer of door handles. The door handles cost $1.75 each to manufacture
and they are sold at $5 each. The following information has been made available for the month
of September 2023:
Number of units manufactured and sold 20,000
Fixed Costs 15,000
Fixed Overheads (Admin & Selling) 25,000
a. Prepare operating statements based on both Absorption and Variable Costing [10
marks]
Absoption Costing
Direct Materials $35, 000
Fixed Costs $15, 000
Fixed Overheads $25, 000
Total Product Cost $75, 000
÷ Total Units ÷ 20000
Produced
Product cost per unit $3.75
Variable Costing
Direct Materials $35, 000
Fixed Costs $15, 000
Total Product Cost $55, 000
÷ Total Units ÷ 20000
Produced
Product cost per unit $2.75
b. Explain the main differences between marginal costing and absorption costing [5 marks]
The main difference between marginal costing and absorption costing is that in marginal costing,
variable cost is treated as product cost, and fixed cost is treated as period cost. On the other hand,
in absorption costing, variable and fixed costs are treated as product costs. The objective of
marginal costing is to emphasize the importance of contributing to the product cost and that of
absorption is to demonstrate the accuracy and fairness of product cost treatment. Marginal
costing determines the cost of the next unit and absorption costing determines the cost of each
unit.
c. Using the information provided above, assume the only 18,000 of the units provided were
sold, and the outstanding 2,000 units were carried forward as inventory into the next
period. Prepare operating statements based on both absorption and variable costing. [10
marks]
Absorption Costing
Direct Materials $35, 000
Fixed Costs $15, 000
Fixed Overheads $25, 000
Total Product Cost $75, 000
× Total Units outstanding 2000
× Product cost per unit $3.75
Question 4
a. Discuss the advantages and disadvantages of standard costing. [10 marks]
b. The following standard costs are available for a unit of product X, produced by Loliwe Ltd:
i. Direct Raw Materials (50 kg @ $2.5/kg) $125.00
ii. Direct Labour (7 hours@ $9.50/hour $66.50
Total $191.50
Actual result for January 2023:
Production 150 units
Direct Material Purchases 7,000 kgs @ a cost of $18,200
Opening Inventory of Direct Material 1,300 kgs
Closing Inventory of Direct Material 850 kg
Wages paid ( 1,010 hours) $9,898
You are require to calculate the Direct Materials total variance and the Direct Labour
Total
Variance, clearly showing all workings. [10 marks]
c. Write brief notes on the following terms, giving appropriate examples.
i. Standards
ii. Overheads
iii. Variance Analysis
iv. Labour Variances
v. Material Variances [15 marks]