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STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 1
KINDLY REFER TO CHAPTER 1 OF THE COMPREHENSIVE LECTURES
TO READ UP THE TOPIC BEFORE YOU ATTEMPT THE QUESTIONS
BELOW FOR PROPER UNDERSTANDING AS THE TOPIC HAS BEEN
DISCUSSED IN THE SAID VIDEO LECTURES. THANKS
ICAN MI (COSTING)
WEEK 1
TOPICS: INTRODUCTION TO COSTING
SUGGESTED SOLUTIONS
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 2
1. ……………. is the expenditure (actual or notional) incurred on or
attributable to a given thing or described as the resources that have been
sacrificed or must be sacrificed to attain a particular objective.
A. Costing
B. Cost
C. Cost centre
D. Cost unit
THE CORRECT ANSWER IS B
2. The term that is used to classifying, recording, allocation and appropriation
of expenses for the determination of cost of products or services and for the
presentation of suitably arranged data for the purpose of control and
guidance of management.
A. Costing
B. Cost
C. Cost centre
D. Cost unit
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 3
THE CORRECT ANSWER IS A
3. …………… primarily deals with collection, analysis of relevant of cost
data for interpretation and presentation for various problems of
management.
A. Costing
B. Cost accountancy
C. Cost accounting
D. Cost technique
THE CORRECT ANSWER IS C
4. …………… is a broader term and is defined as, ‘the application of costing
and cost accounting principles, methods and techniques to the science and
art and practice of cost control and the ascertainment of profitability as well
as presentation of information for the purpose of managerial decision
making.
A. Costing
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 4
B. Cost accountancy
C. Cost accounting
D. Cost technique
THE CORRECT ANSWER IS B
5. One of the following is a feature of cost control
A. Cost control is a continuous process and involves setting standards and
budgets for deciding targets of different expenses and constant comparison of
actual the budgeted and standards.
B. Cost control involves creation of responsibilities centre with clearly
defined authorities and responsibilities.
C. It also involves, timely cost control reports showing the variances between
standard and actual performance.
D. All of the above
THE CORRECT ANSWER IS D
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 5
6. Which of the following is an objective of cost accounting?
A. To indicate to the management any inefficiencies and the extent of various
forms of waste, whether of materials, time, expenses or in the use of machinery,
equipment and tools. Analysis of the causes of unsatisfactory results may
indicate remedial measures.
B. To provide data for periodical profit and loss accounts and balance sheets at
such intervals, e.g., weekly, monthly or quarterly, as may be desired by the
management during the financial year, not only for the whole business but also
by departments or individual products. Also, to explain in detail the exact
reasons for profit or loss revealed in total, in the profit and loss account.
C. To reveal sources of economies in production having regard to methods,
types of equipment, design, output and layout. Daily, weekly, monthly or
quarterly information may be necessary to ensure prompt and constructive
action.
D. All of the above
THE CORRECT ANSWER IS D
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 6
7. Which of the following best explains the major importance of cost
accounting?
A. Cost accounting helps in channelizing production on right lines - proper
costing information makes it possible for the management to distinguish
between profitable and non-profitable activities. Profits can be maximized by
concentrating on profitable operations and eliminating non-profitable ones.
B. Cost accounting eliminates wastages – As cost accounting is concerned with
detailed break-up of costs, it is possible to check various forms of wastages or
losses.
C. Cost accounting makes comparisons possible – Proper maintenance of
costing records provides various costing data for comparisons which in turn
helps the management in formulation of future lines of action.
D. All of the above
THE CORRECT ANSWER IS D
8. The three broad elements of costs include the following
A. Historical, pre-determined and estimated costs
B. Material, labour and expenses
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 7
C. Total, fixed and variable
D. Material, direct and indirect
THE CORRECT ANSWER IS B
9. The major distinguishing feature of fixed and variable cost is that fixed costs
are those costs that remain constant throughout the production period whereas
variable costs are those costs that vary with the level of output.
A. True
B. False
C. Undecided
D. Ambiguous
THE CORRECT ANSWER IS A
10. …………. are costs that contain fixed and variable elements and because of
the variable element, they fluctuate with volume and because of the fixed
element; they do not change in direct proportion to output.
A. Total cost
B. Average cost
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 8
C. Marginal cost
D. Semi-fixed (semi –variable) costs
THE CORRECT ANSWER IS D
11. Functional costs can be simply classified into which of the following
A. Manufacturing / production Costs
B. Administration Cost
C. Selling and distribution cost
D. All of the above
THE CORRECT ANSWER IS D
12. The cost of replacing an asset at current market values is called …………..
A. Conversion cost
B. Controllable cost
C. Uncontrollable cost
D. Replacement cost
THE CORRECT ANSWER IS D
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 9
13. One of the following is a major principle of costing
A. There must be a close relationship between cost and what is being costed
B. Appropriate cost should be charged to cost unit or cost centre that enjoys the
benefits of the cost
C. The conservative convention should be ignored since it emphasizes the
conservative valuation of assets in order to avoid the risk of paying dividends
out of capital
D. All of the above
THE CORRECT ANSWER IS D
14. Which of the following is not among the techniques of costing?
A. Absorption or total costing
B. Marginal costing
C. Standard costing
D. Contract costing
THE CORRECT ANSWER IS D
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 10
15. Which of the following is a process involved in setting up a sound costing
system?
A. Ascertaining the objective of management in installing the system
B. Ascertaining the information required by the management
C. Ascertaining and understanding the technical features of the class of industry
concerned
D. All of the above
THE CORRECT ANSWER IS D
16. A cost that has already been incurred and that cannot be changed by any
decision made now or in the future is called ………….
A. Differential cost
B. Sunk cost
C. Opportunity cost
D. Product cost
THE CORRECT ANSWER IS B
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 11
17. Because of irregular power supply from Power Holding Company of
Nigeria, Ray Power FM leased a 20KV generator from Holt leasing Nigeria
Limited for electricity supply during power failure. The lease agreement calls
for a flat monthly lease payment of N10,000 plus N300 for each hour that the
generator is in operation. During the month of December, the generator set was
operated for cumulative period of 50 hours. Determine the total cost of operating
the generator set in the month of December by Ray Power FM.
A. N15,000
B. N25,000
C. N35,000
D. N45,000
Total fixed cost = N10,000
Total variable cost = No. of operating hrs. X Rate per hr.
= 50 X 300
= N15,000
Total operating cost for the month of December = FC + VC
= N(10,000 + 15,000)
= N25,000
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 12
THE CORRECT ANSWER IS B
18. The major difference between cost accounting and financial accounting is
that ………..
A. Cost accounting information is meant for the use of internal decision makers
of the business while financial accounting information is meant for both the
management and external users
B. Cost accounting is to aid internal decision making in the organization while
financial accounting is to enable management to render accounts of its
stewardships in terms of the profits generated in relation to the assets invested in
the business
C. The primary emphasis of cost accounting is segment reporting while the
focus of financial accounting is on the totality of the business rather than the
individual parts
D. All of the above
THE CORRECT ANSWER IS D
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 13
19. The major difference that exists between sales and variable cost of the sales
can be termed ……….
A. Profit
B. Revenue
C. Contribution
D. Direct cost
THE CORRECT ANSWER IS C
20. A trader buys an article for N6 and then sells it for N10. What is the profit
and contribution of the trader?
A. N2000 / N2500
B. N4000 / N3000
C. N2500 / N2000
D. N3000 / N4000
From the question,
Selling price = N10
Variable cost = N6
By formula, Contribution = Sales – Variable cost
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 14
= N(10 – 6)
= N4
NOTE:
Contribution is the difference between Sales and Variable cost.
Profit = Contribution – fixed cost
That is, Profit is the difference between contribution and fixed cost.
Since the question does not involve fixed cost, then it would be difficult to
compute the profit.
Therefore, Contribution is N4
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 15
THEORY PART
ATTEMPT ALL QUESTIONS
QUESTION 1
What do you understand by Cost Accounting?
By cost accounting, we simply refer to the process of collecting, summarizing,
analyzing and reporting in monetary terms tailor-made information to
management showing the costs and benefits of pursuing each alternative course
of action open to management.
In other words, cost accounting is a broad term used to explain the principles,
methods, techniques and convention which are employed in business for
planning, control, decision making, analysis and evaluation of utilization of the
business resources that is material, facilities and employees.
Discuss the major principles that underline Cost Accounting
For better understanding and appreciation of cost accounting, there is the need to
be aware of some of the basic principles guiding the subject.
The principles are;
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 16
i. There must be a close relationship between cost and what is being
costed
ii. Appropriate cost should be charged to cost unit or cost centre that
enjoys the benefits of the cost
iii. The conservative convention should be ignored since it emphasizes
the conservative valuation of assets in order to avoid the risk of
paying dividends out of capital
iv. Cost accounting aims to provide information on activity of an
organization to assist managers to perform well
v. Past costs should never be charged to future periods because they
can distort future period results and thus misleading the
management.
Distinguish clearly between Costing methods and costing techniques with
relevant examples
By costing methods, we simply refer to the methods of costing which are
purely designed to suit way goods are produced or the way services are
provided. Therefore, costing methods depend upon the nature of production.
Examples are;
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 17
i. Specific order costing which includes job or batch costing and
contract costing
ii. Operation costing such as process or operation costing, joint and
by-products costing and service operation costing.
On the other hand, costing techniques are those designed to suit the manner in
which it is decided to present the information to management. They largely
depend upon the purpose to which the management requires the information.
Examples of costing techniques are absorption or total costing, marginal costing,
standard costing, budget and budgetary control.
What are the major uses of cost accounting? Highlight the major processes
involved in setting up a sound cost system
The major uses of cost accounting include the following;
i. Cost accounting information assists in identifying areas of
wastages and inefficiencies
ii. It also gives explanation about reasons for increase or decrease
in profit
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 18
iii. It also assists in data collection on actual performance and
presenting them against the background of the budget
iv. The system assists in formulation of cost reduction proposal and
it duly follows it up
v. Installation of costing system would lead to effective cost
control
However, the major processes involved in setting up a sound costing system are;
i.Ascertain the objective of management in installing the system
ii.Ascertain the information required by the management
iii.Ascertain and understand the technical features of the class of industry
concerned
iv.Study the expected individual characteristics of the company
v.Select a suitable costing method
vi.Design suitable forms to collect cost data
vii.Design the cost codes
viii.Prepare a cost manual to guide the costing staff in operating the system
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 19
QUESTION 2
Explain controllable and non-controllable cost with relevant examples.
Controllable costs are those which can be influenced by the action of a specified
member of an undertaking. A business organization is usually divided into a
number of responsibility centres and each such centre is headed by an executive.
Controllable costs incurred in a particular responsibility centre can be influenced
by the action of the executive heading that responsibility centre. Direct costs
comprising direct labour, direct materials, direct expenses and some of the
overhead are generally controllable by the top level management.
Non-controllable costs are those which cannot be influenced by the action of a
specified member of an undertaking. For example, expenditure incurred by the
tool room is controllable by the tool room manager but the share of the tool
room expense which is apportioned to the machine shop cannot be controlled by
the machine shop manager. It is only in relation to a particular individual that a
cost may be specified as controllable or not.
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 20
‘Cost centre’ and ‘Cost unit’ are one and the same. Explain your stand
There are significant differences between cost centre and cost unit, hence they
are not one and the same as they connote different meanings and definitions.
CIMA defines Cost Centre as “a production or service, function, activity or item
of equipment whose costs may be attributed to cost units.
A cost centre is the smallest organizational sub-unit for which separate cost
allocation is attempted”.
A cost centre is an individual activity or group of similar activities for which
costs are accumulated. For example in production departments, a machine or
group of machines within a department or a work group is considered as cost
centre.
Any part of an enterprise to which costs can be charged is called as ‘cost centre’.
A cost centre can be :
(i) Geographical i.e. an area such as production department, stores, sales area.
(ii) An item of equipment e.g. a lathe, forklift, truck or delivery vehicle.
(iii) A person e.g. a sales person.
On the other hand, CIMA defines Cost Unit as “a quantitative unit of product or
service in relation to which costs are ascertained”.
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 21
A ‘cost unit’ is a unit of product or unit of service to which costs are ascertained
by means of allocation, apportionment and absorption.
It is a unit of quantity of product, service or time or a combination of these in
relation to which costs are expressed or ascertained. For example, specific job
Write short notes on the following:
Cost: This is the expenditure (actual or notional) incurred on or attributable to a
given thing or described as the resources that have been sacrificed or must be
sacrificed to attain a particular objective.
Costing: This is the term that is used to classifying, recording, allocation and
appropriation of expenses for the determination of cost of products or services
and for the presentation of suitably arranged data for the purpose of control and
guidance of management.
Profit centre: This is defined as, ‘a segment of the business entity by which
both revenues are received and expenses are incurred or controlled’.
Cost sheet: This is a statement of cost showing the total cost of production and
profit or loss from a particular product or service. A Cost Sheet shows the cost
in a systematic manner and element wise.
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 22
Cost control: It implies various actions taken in order to ensure that the cost do
not rise beyond a particular level while cost reduction means reducing the
existing cost of production. It also means keeping the expenses within limits or
control.
Cost reduction: This refers to attempt to reduce the costs. For example, if the
present costs are #1,500 per unit, attempts can be made to reduce it to bring it
down to #1,000 and below.
QUESTION 3
Explain the major difference between avoidable cost and unavoidable cost
Avoidable costs are those costs which under the present conditions need not
have been incurred. In other words, avoidable costs are those costs that that may
not be incurred but avoided by an organization for some specific reasons.
Example: (a) spoilage in excess of normal limit; (b) Unfavourable cost variances
which could have been controlled
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 23
On the other hand, unavoidable costs are the direct opposite of avoidable costs.
They are those costs which under the present conditions must be incurred
irrespective of the objectives of the organization.
How would you differentiate between direct fixed cost and common fixed
cost?
By definition, direct fixed cost can be seen as cost that can be directly traced to
the production cost. It could also mean the cost that is incurred by and solely for
a given product while common fixed cost is a cost that relates to two or more
segments or it is a cost that supports the operation of more than one segment.
Explain the significant relationship between contribution and profit
There exists significant relationship between contribution and profit which can
be stated below;
Profit = Contribution – Fixed cost
Contribution = Profit + Fixed cost
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 24
By implication, there are two ways of looking at Contribution
i. Contribution = Sales – Variable cost
ii. Contribution = Profit + Fixed cost
QUESTION 4
The following cost and activity data were taken from factory records
Activity (Units) Cost incurred (N)
15 180
12 140
20 230
17 190
12 160
25 300
22 270
9 110
18 240
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 25
30 320
Using the least squares method of linear regression, calculate the fixed and
variable elements of cost.
Since the level of Activity is greatly dependent upon the Cost.
Therefore, we can say that Activity is a dependent variable (Y) and Cost is an
independent variable (X)
Given the cost equation;
Y = a + bX
Where;
Y = Activity level
X = Cost incurred
a = fixed cost
b = variable cost
To get fixed cost, a
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 26
a = ∑Y . ∑X2 - ∑X . ∑XY
n∑X2 – (∑X)2
b = n∑XY - ∑X . ∑Y
n∑X2 – (∑X)2
X Y X2 XY
15 180 225 2700
12 140 144 1680
20 230 400 4600
17 190 289 3230
12 160 144 1920
25 300 625 7500
22 270 484 5940
9 110 81 990
18 240 324 4320
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 27
30 320 900 9600
180 2140 3616 42480
∑X = 180, ∑Y = 2140, ∑X2 = 3616, ∑XY = 42480
a = (2140)(3616) – (180)(42480)
10(3616) – (180)2
= 7738240 – 7646400
36160 – 32400
= 91840/3760
= 24.43
b = 10(42480) – (180)(2140)
10(3616) – (180)2
= 424800 – 385200
36160 – 32400
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 28
= 39600/3760
= 10.53
Therefore, Fixed cost = N24.43 and Variable cost = N10.53
STARRY GOLD ACADEMY +2348023428420, +2347038174484, [email protected] , www.starrygoldacademy.com Page 29