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Elements ofCostingChapter activities

© Osborne Books Limited, 2016

2 e l e m e n t s o f c o s t i n g t u t o r z o n e

1.2 Hothouse Ltd is a tomato grower. Classify the following costs by nature (direct or indirect) by putting a tick in the relevant column of

the table below.

Cost Direct Indirect(a) Compost used to plant seeds(b) Insurance of greenhouses(c) Tomato seeds(d) Wages of employees who pick tomatoes

1.1 Hothouse Ltd is a tomato grower.Classify the following costs into the categories of materials, labour or overheads by putting a tick inthe relevant column of the table below.

Cost Materials Labour Overheads(a) Compost used to plant seeds (b) Insurance of greenhouses(c) Tomato seeds(d) Wages of employees who pick tomatoes

1.3 Travis Limited manufactures bicycles from components.Classify the following costs by function (production, administration, or selling and distribution) byputting a tick in the relevant column of the table below.

Cost Production Administration Selling and distribution(a) Purchases of handlebars for bicycles(b) Fuel for delivery vehicles (c) Administration stationery(d) Salaries of sales staff

The costing system1

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1.4 A trainee in the costing department has made the following statements. You are to identify whichstatements are true and which are false by ticking the appropriate column.

Statement True False

(a) Information to help with future costs can only comefrom inside the organisation

(b) Budgets can be used as a source of data for futurecosts

(c) Costing can be used by both manufacturingorganisations and the service industry

(d) A quotation from a supplier is not a valid source of datafor current costs

(e) A good source of data for historical costs is financialaccounting records and the documents that back upthese records

(f) A sales forecast can provide a good source of data forestimating future income

(g) Financial accounts cannot provide information aboutfuture costs

(h) Planned pay rises can be used to help estimate futurecosts

(i) The production level that is planned can be relevantwhen estimating future costs

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2.1 Identify which one of the following lists could be used as cost centres for a company that makesdesks.

(a) Material; Labour; Expenses

(b) Prime Cost; Manufacturing Overheads; Non-production overheads

(c) Direct costs; Indirect Costs

(d) Drawer construction; Frame construction; Administration; Dispatch

2.2 You work in the costing section of a company that manufactures windows. The factory is dividedinto a framing section where window frames are constructed and a glazing section where the glassis cut to size and fixed into the frame.An extract from the coding policy manual is as follows:Each code is made up of three digits:• the first digit shows the cost centre• the second digit shows whether the cost is direct, or indirect • the third digit is for the element of cost (materials, labour, expenses) Extract from cost centre list:1 Factory – Framing Section2 Factory – Glazing3 OfficesExtract from list of analysis codes (second digit)1 Direct2 Indirect Extract from list of analysis codes (third digit)1 Materials2 Labour3 Expenses

Cost centres and overhead absorption2

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The following table shows various costs and the codes that have been allocated to these costs byan inexperienced trainee. Check the codes given, and write the correct code in the next column.

Cost description Code given Correct code

Wages of the glazier who cuts the glass 212

Wood for window frames 113

Maintenance of tools in framing section 111

Wages of the cleaner who works in the framing section 122

Office telephone costs 333

Glass 211

Stationery for office 322

2.3 Brightways Limited is an opticians that owns three high street opticians branches. These branchesare located on Eye Street, Frame Road and Lens Lane. Each shop is an investment centre.The following is an extract from the coding manual used by the business.

Investment centre Code Eye Street ESFrame Road FRLens Lane LL

Revenue, cost or investment Branch sales of spectacles 100Branch purchases 200Labour costs 300Overheads 400Investment in new branch equipment 800

Each code consists of a pair of letters followed by a 3 digit number.

Complete the following table with the appropriate codes.

Transaction CodeSales of spectacles at Frame RoadPurchase of a new eye testing machine at Eye StreetRent of the premises at Lens LaneWages of the optician at Eye StreetPurchase of a new spectacle cleaning machine for Frame RoadPurchase of coffee for the machine at Lens Lane

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c h a p t e r a c t i v i t i e s 7

2.4 A company has a single cost centre in its factory where several different products are made. Thefollowing budgeted data relates to the factory:

Overheads £354,200Direct labour hours 46,200Machine hours 31,250

Product J is one of the products made in the factory. It has the following data per unit:Direct materials cost £27.80Direct labour cost at £12.00 per hour £30.00Machine hours 2 hours

• Complete the following table to show the alternative overhead absorption rates and the totalcost per unit of Product J using each absorption method. Round the overhead absorptionrate to four decimal places of £, and calculate the overhead absorbed to the nearest penny.

Overhead absorption method Direct labour hours Machine hours £ £

Overhead absorption rate

Product J costs:

Direct materials

Direct labour

Overheads

Total costs

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2.5 Torros Limited is a manufacturing company with two cost centres in its factory; Fabrication andAssembly. Both cost centres are labour intensive. The following data relates to the cost centres:

Fabrication Assembly TotalBudgeted indirect costs £143,700 £95,200 £238,900Budgeted direct labour hours 35,800 24,600 60,400

One of the products made in the factory is Product Q. Its manufacture takes five hours direct labourin Fabrication, and 1 hour 30 minutes direct labour in Assembly.

Using the following tables, calculate the overhead absorption rates and the overheads that areabsorbed into each unit of Product Q. Round all amounts to the nearest penny.

Budgeted indirect Budgeted direct Overhead absorption costs labour hours rate £ £

Fabrication

Assembly

Product Q Direct labour Overhead Overhead absorbed hours per unit absorption rate £ £

Fabrication

Assembly

Total

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Cost behaviour3

3.1 Pizza Impress Ltd is a shop that makes and delivers pizzas.Classify the following costs by their behaviour (fixed, variable, or semi-variable) by putting a tick inthe relevant column of the table below.

Cost Fixed Variable Semi- variable(a) Wages of cooks paid a flat rate per week

(b) Delivery workers paid a fixed wage plus anamount per pizza delivered

(c) Packaging materials for finished pizzas

(d) Rent of premises

3.2 Complete the table below showing fixed costs, variable costs, total costs and unit cost at thedifferent levels of production.

Units Fixed costs Variable costs Total costs Unit cost

500 £30,000 £5,000 £35,000 £70.00

1,000 £ £ £ £

1,500 £ £ £ £

2,000 £ £ £ £

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3.3 Gamma Ltd is costing a single product which has the following cost details:Variable costs per unit Materials £3Labour £2Total fixed costs £22,500

Complete the following total cost and unit cost table for a production level of 15,000 units.

Element Total cost Unit cost

Materials £ £

Labour £ £

Fixed costs £ £

Total £ £

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3.4 A semi-variable cost totals £106,200 when the activity level is 6,000 units and totals £124,600 whenthe activity level is 10,000 units.Use the following tables to:• Calculate the variable costs (per unit) and the fixed costs (in total)• Calculate the total costs at the activity levels shown

Variable cost calculation Total costs £ Units

High data

Low data

Difference

Variable cost per unit £

Fixed cost calculation Number of units Costs £

Total costs

Variable costs

Fixed costs

Total cost calculation Variable costs £ Fixed costs £ Total costs £

7,000 units

7,500 units

9,000 units

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3.5 A semi-variable cost totals £147,150 when the 4,500 units are made and totals £206,350 when8,200 units are made.Use the following tables to:• Calculate the variable costs (per unit) and the fixed costs (in total)• Calculate the total costs at the activity levels shown

Variable cost calculation Total costs £ Units

High data

Low data

Difference

Variable cost per unit £

Fixed cost calculation Number of units Costs £

Total costs

Variable costs

Fixed costs

Total cost calculation Variable costs £ Fixed costs £ Total costs £

5,000 units

6,000 units

7,000 units

3.6 Identify the type of cost behaviour (fixed, variable, or semi-variable) described in each statement byticking the relevant boxes in the table below.

Statement Fixed Variable Semi- variable

At 2,000 units the cost is £7,800 and at 4,800 units thecost is £14,520

At 8,000 units the cost is £36,800, and at 11,500 units thecost is £52,900

At 3,500 units the cost is £20 per unit, and at 5,000 unitsthe cost is £14 per unit

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4.1 Identify which inventory valuation method is being used in the following situation, and tick theappropriate box.

Receipts Issues Balance Quantity Cost Total Quantity Value Total Quantity Total(units) per unit cost per unit value value100 £20 £2,000 100 £2,000150 £25 £3,750 250 £5,750 120 £25 £3,000 130 £2,750

FIFO LIFO AVCO

4.2 The following table shows the movements in a certain type of inventory through a business’s storesin February.

Date Receipts Issues Units Cost Units Cost Feb 6 120 £600 Feb 15 150 £675 Feb 22 200 £1,000 Feb 26 250 Feb 27 100 £550

Complete the table below for the issue and closing inventory values.

Method Value of issue on Feb 26 Value of closing inventory on Feb 28FIFO £ £LIFO £ £AVCO £ £

Inventory valuation and themanufacturing account4

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4.3 The following table shows the movements in a certain type of inventory through a business’s storesin September.

Date Receipts Issues Units Cost Units Cost Sept 4 100 £1,000 Sept 11 180 £1,980 Sept 13 180 £1,890 Sept 18 250 Sept 25 120 £1,440

Complete the table below for the issue and closing inventory values.

Method Value of issue on Sept 18 Value of closing inventory on Sept 30

FIFO £ £LIFO £ £AVCO £ £

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4.4 Place the following headings and amounts into the correct format of a manufacturing account onthe right side of the table, including inserting amounts where necessary. The first entry has beencompleted for you.

£ £Manufacturing cost Opening inventory of raw materials 3,000

Opening inventory of raw materials 3,000

Closing inventory of work in progress 13,000

Cost of goods sold

Opening inventory of work in progress 15,000

Closing inventory of finished goods 19,000

Closing inventory of raw materials 10,000

Direct labour 25,000

Raw materials used in manufacture 30,000

Purchases of raw materials 37,000

Cost of goods manufactured

Opening inventory of finished goods 20,000

Manufacturing overheads 17,000

Direct cost

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5.1 Identify the following statements as true or false by putting a tick in the relevant column of the tablebelow.

True False

(a) Indirect labour costs always behave as semi-variable costs

(b) Direct labour costs can always be identified with the productsbeing made or services being provided

(c) A flat rate of pay plus a production-based bonus is an example ofa semi-variable labour cost

5.2 Oxford Ltd pays a time-rate of £10 per hour to its direct labour for a standard 35 hour week. Any ofthe labour force working in excess of 35 hours is paid an overtime rate of £13 per hour.Calculate the gross wage for the week for the two workers in the table below.

Worker Hours worked Basic wage Overtime Gross wage

I. Morse 38 hours £ £ £

S. Lewis 35 hours £ £ £

5.3 Cambridge Ltd uses a piecework method to pay labour in one of its factories. The rate used is£8.00 for every ten units produced.Calculate the gross wage for the week for the two workers in the table below.

Worker Units produced in a week Gross wage

V Barnaby 420 units £

A Sinclair 390 units £

Labour costs5

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5.4 Cheltenham Limited uses a time-rate method with bonus to pay its direct labour in one of itsfactories. The time-rate used is £8 per hour and a worker is expected to produce 25 units an hour.Anything over this and the worker is paid a bonus of £0.20 per unit.Calculate the gross wage for the week including bonus for the three workers in the table below.

Worker Hours worked Units produced Basic wage Bonus Gross wage

A Smith 35 850

J Jones 35 975

M Clive 35 905

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6.1 Keynes Ltd makes a single product and for a production level of 12,000 units has the following costdetails:

Direct materials 300 kilos at £100 per kiloDirect labour 600 hours at £15 an hourOverheads £30,000

Complete the table below to show the unit cost at the production level of 12,000 units.

Element Unit cost Materials £Labour £Overheads £Total £

6.2 Identify the following statements as being true or false by putting a tick in the relevant column of thetable below.

True False(a) A budget is a financial report for an organisation that provides

information on recent costs(b) If actual costs are less than budgeted costs the result is a

favourable variance

Providing information – budgets andvariances6

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6.3 Lincoln Ltd has produced a performance report detailing budgeted and actual cost for last month. Calculate the amount of the variance for each cost type and then determine whether it is adverseor favourable by putting a tick in the relevant column of the table below.

Cost type Budget £ Actual £ Variance Adverse Favourable

Direct materials 41,200 39,200 £

Direct labour 40,700 47,000 £

Production overheads 25,600 25,200 £

Administration overheads 14,200 14,700 £

Selling and distribution overheads 19,800 20,100 £

6.4 The following performance report for last month has been produced for Lincoln Ltd as summarisedin the table below. Any variance in excess of 3% of budget is thought to be significant and shouldbe reported to the relevant manager for review and appropriate action.Examine the variances in the table below and indicate whether they are significant or not significantby putting a tick in the relevant column.

Cost type Budget £ Variance £ Adverse/ Significant Not Favourable significant

Direct materials 41,500 700 A

Direct labour 40,400 900 F

Production overheads 25,000 1,200 A

Administration overheads 14,100 850 F Selling and distributionoverheads 19,500 500 F

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6.5 The performance report produced for Gleaming Ltd for last month indicated that the following costvariances were significant:• Direct labour cost• Administration overheadsThese variances needed to be reported to the relevant managers for review and appropriate actionif required.Select from the following list a relevant manager for each significant variance to whom theperformance report should be sent:

Production ManagerSales ManagerTraining ManagerManaging DirectorOffice ManagerPurchasing Manager

Variance Manager

Direct labour cost

Administration overheads