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Cost classification
Home Level 2 2.2 Management Accounting Archive by Category "Cost classification"

Category: Cost classification

2.2 Management AccountingCost classificationLevel 2

Nov 2020 Q5 a.

Quickspray Ltd offers professional car spraying services at Suame Magazine. The company is planning its activities for the month of June 2018 for its saloon car spraying section. The company charges service fee of GH¢1,000 and incurs fixed cost (excluding fixed maintenance cost) and variable cost per unit (excluding variable maintenance cost) of GH¢35,000 and GH¢644.39 respectively for spraying of a saloon car.

The following data also relates to Quickspray Ltd on the maintenance hours of its key machine, revenue and profit for the six months ended April 2018.

Total fixed cost increases by GH¢1,120 when maintenance hours go beyond 1,400.

Required:
a) Determine the total maintenance cost of production, using high-low method if;
i) Maintenance hours of May was budgeted to be 1,520.
ii) Maintenance hours of June is budgeted to be 1,075. (10 marks)

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2.2 Management AccountingCost classificationLevel 2

May 2019 Q2 a.

Komosa Ltd is reviewing the selling price of its product for the coming year. A forecast of the annual costs that would be incurred by Komosa Ltd in respect of this product at differing activity levels is as follows:

The cost behaviour represented in the above forecast will apply for the whole range of output up to 300,000 units per annum of this product.
Required:
i) Calculate the total variable cost per unit and total fixed overhead.                                                                              (4 marks)

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ii) State the total cost function.                                                                                                                                          (1 mark)

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Y= 300,000 + 13.8x

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2.2 Management AccountingCost classificationLevel 2

Nov 2018 Q2 a.

Costs may be classified as fixed or variable. This classification method is useful for decision making because variable costs are relevant cost whereas fixed costs are irrelevant.
Required:
Explain this statement.                                                                                                                                           (5 marks)

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  • Generally, the classification of costs as fixed or variable identifies those costs which changes in total when activity changes (variable costs) and those whose total remains constant (fixed costs).
  • Relevant costs are those which are affected by a decision, and since most decisions affect activity levels, variable costs (which change when activity changes) can be seen to be relevant costs.
  • However, it does not automatically follow that fixed costs are not relevant. Some fixed costs may be specific to product or department and therefore may be avoidable. For example, a decision to discontinue a product will cause the product specific cost to be saved.
  • The general notion that fixed costs are not relevant is therefore incorrect thus each decision must be considered individually there would be circumstances when fixed cost must be considered relevant, due to their avoidability.

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2.2 Management AccountingCost classificationLevel 2

Nov 2017 Q2 a.

An efficient and effective coding system, whether manual or computerized should incorporate certain features.
Required:
Identify and explain FIVE features of a good coding system.                                                                                            (5 marks)

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  • Every number used in the code should be unique and certain, i.e. it should be easily identified from the structure of the code.
  • Elasticity and comprehensiveness is an absolute must for a well-designed coding system. It should be possible to identify a code for every item and the coding system should be capable of expanding to accommodate new items.
  • The code should be brief, meaningful and significant.
  • The maintenance of the coding system should be centrally controlled. It should not be possible for individuals to independently add new codes to the existing coding system.
  • Codification systems should be of the same length. This makes errors easier to spot and it assists computerized data processing.
  • The coding system must allow for expansion.
  • The likelihood of errors going undetected should be minimized.
  • If the code consists of alphabetic characters, it should be derived from the item’s description or name (ie mnemonics should be used).
  • There should be readily available index or reference book of codes.
  • Existing codes should be reviewed regularly and out-of-date codes removed.                                      (Any 5 points)

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