Overhead cost is an indirect cost

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F2- COST AND COST CLASSIFICATION ANSWERS

1. C

This is a simple definition of a semi-fixed and semi-variable cost.

2. D

Material costs vary with the volume of production.

3. B

An overhead cost is an indirect cost. This is cost that cannot be traced directly to a unit of

production or sale, or any other cost unit. Overheads include indirect materials costs,

indirect labour costs and indirect expenses (for example, factory rental costs, machinery

insurance costs, machinery depreciation and so on).

4. B

A direct cost is a cost that can be traced directly to a unit of production or sale, or another

cost unit. ‘Economically’ means that the benefit from identifying and tracing the direct cost

to the cost unit must be worth the cost and the effort. In practice, this means that low-cost

items, particularly low-cost material items, might be treated as indirect costs because the

benefit from the greater ‘accuracy’ from treating them as direct material costs is not worth

the cost and the effort.

5. B

6. D

All four items could be treated as direct materials costs. However, staples are a very low-

cost material item, and it would probably not be worth the effort to treat them as direct

material costs to gain greater accuracy in costing. Instead, the cost of staple purchases

will probably be treated as an overhead expense. (This illustrates the point that a direct

cost is expenditure that can be identified with a specific cost unit, but only if it is ‘economical’

to do so.

7. C

A would be a line parallel with the base line showing units. B would be a line commencing

at ‘0’ and would show a linear pattern. C would show a stepped effect, fixed for a short

range, with successive increases.

8. A

Total cost of 15,100 square metres 83,585

Total cost of 12,750 square metres 73,959

Variable cost of 2,350 square metres 9,635

Variable cost is $9,635/2,350 square metres - $4.10 per square metre.

Fixed costs can be found by substitution:

Total cost of 12,750 square metres 73,950

Variable cost of 12,750 square metres (X $4.10 52,275

Fixed costs 21,675

So for 16,200 square metres:

Overheads = $21,675 + (16,200 x $4.10)

= $88,095

9. C

Total cost of 18,500 hours 251,750

Total cost of 17,000 hours 246,500

Variable cost of 1,500 hours 5,250

F2- COST AND COST CLASSIFICATION ANSWERS

Variable cost per hour = $5,250/1,500 hours = $3.50.

Total cost of 17,000 hours 246,500

Less variable cost of 17,000 hours (x $3.50) 59,500

Balance = fixed costs 187,000

10. B

11. B

12. B

13. D

14. B

15. B

16. C

17. D

18. C

19. B

20. B

The royal try cost can be traced in full to the product, i.e. it has been incurred as a direct

consequence of making the product. It is therefore a direct expense. Option A, C and D

is all overheads or indirect costs, which cannot be traced directly and in full to the product.

21. B

The wages paid to the stores assistant cannot be traced in full to a product or service,

therefore this is an indirect lab our cost.

The assembly worker’s wages can be traced in full the television manufactured (option A),

therefore this is a direct lab our cost.

The wages paid to plasterers in a construction company can be traced in full to they

contract or building they are working on (option C). This is also a direct lab our cost.

The audit clerks time can be traced to specific clients or jobs (option D) and would

therefore be classified as a direst lab our cost.

22. B

Overtime premium is always classed as factory overheads unless it is;

 Worked at the specific request of a customer to get his order completed.

 Worked regularly by a production department in the normal course of operations, in

which case it is usually incorporated into the direct lab our hourly rate.

23. D

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1. C This is a simple definition of a semi-fixed and semi-variable cost. 2. D Material costs vary with the volume of production. 3. B An overhead cost is an indirect cost. This is cost that cannot be traced directly to a unit of production or sale, or any other cost unit. Overheads include indirect materials costs, indirect labour costs and indirect expenses (for example, factory rental costs, machinery insurance costs, machinery depreciation and so on). 4. B A direct cost is a cost that can be traced directly to a unit of production or sale, or another cost unit. ‘Economically’ means that the benefit from identifying and tracing the direct cost to the cost unit must be worth the cost and the effort. In practice, this means that low-cost items, particularly low-cost material items, might be treated as indirect costs because the benefit from the greater ‘accuracy’ from treating them as direct material costs is not worth the cost and the effort. 5. B 6. D All four items could be treated as direct materials costs. However, staples are a very low-cost material item, and it would probably not be worth the effort to treat them as direct material costs to gain greater accuracy in costing. Instead, the cost of staple purchases will probably be treated as an overhead expense. (This illustrates the point that a direct cost is expenditure that can be identified with a specific cost unit, but only if it is ‘economical’ to do so. 7. C A would be a line par ...
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