MAN 1072

Week One Worksheeet

Q1. Classification of Costs

In a business such as Kwik Fit, classify the following costs as: direct materials (DM), direct
labour (DL), manufacturing overhead (M/OH), non-manufacturing overhead (NM/OH):

a) tyres
b) receptionist salary
c) fitter salary
d) depreciation of machinery
e) advertising
f) electricity for workshop
g) exhausts

Q2. One-off Order

Your company has some manufacturing capacity available. A customer has offered to buy
1,000 units of Product A for £500 per unit. The cost of producing Product A, as recorded for
stock valuation purposes, is:

£
Direct materials 200
Direct labour 150
Manufacturing overhead 300
650

Should you accept the order or not?

Q3. Cost Behaviour1

Data £
Cost of motor car 5,500
Estimated trade-in price after two years or 60,000 miles 1,500
Maintenance – service every six months, each costing 60
Spares/replacement parts, per 1,000 miles 20
Vehicle tax, per annum 80
Insurance, per annum 150
Tyre replacements after 25,000 miles, four at £37.50 each 150
Petrol, per gallon 1.90

1
This is Q2.30 in textbook
Average mileage for one gallon is 25 miles.

From the above information, you are required to prepare a schedule to be presented to
management showing, for the mileages of 5,000, 10,000, 15,000 and 30,000 miles per annum:

1. Total variable cost

2. Total fixed cost
3. Total cost
4. Variable cost per mile (to the nearest penny)
5. Fixed cost per mile (to the nearest penny)
6. Total cost per mile (to the nearest penny)

If, in classifying the costs, you consider that some can be treated as either variable or fixed,
state the assumption(s) on which your answer is based together with brief supporting
reasons. (Use template provided to help to prepare your answer.)

Q4. Sunk and Opportunity Costs for Decision Making2

Mrs Johnston has taken out a lease on a shop for a down payment of £5,000. Additionally,
the rent under the lease amounts to £5,000 per annum. If the lease is cancelled, the initial
payment of £5,000 is forfeit. Mrs Johnston plans to use the shop for the next 12 months as
follows:

£ £
Sales 115,000
Less Value-added tax (VAT) 15,000
Sales less VAT 100,000
Cost of goods sold 50,000
Wages and related costs 12,000
Rent, including the down payment 10,000
Rates, heating, lighting and insurance 13,000
Audit, legal and general expenses 2,000
(87,000)
Net profit before tax 13,000

In the figures, no provision has been made for the cost of Mrs Johnston, but she estimates
the business will take up half of her time. She is undecided whether to continue with her
plans because she knows she can sublet the shop to a friend for a monthly rent of £550 if she
does not use the shop herself.

You are required to:

1. explain and identify the ‘sunk’ and ‘opportunity’ costs in the situation depicted
above;
2. state what decision Mrs Johnston should make according to the information given,
supporting your conclusion with a financial statement.

2
This is Q2.31 in textbook
Q3. Solution Template: Schedule of Annual Mileage Costs

5,000 miles 10,000 miles 15,000 miles 30,000 miles

£ £ £ £
Variable costs:

Total variable cost:

Variable cost per mile:

Fixed costs

Total fixed costs

Fixed cost per mile
Total cost
Total cost per mile:
Self-Study Questions:

To test your understanding and reinforce what you have learned on these topics, please try
the following questions:

From the Student Manual (available in SurreyLearn, in the General Module Materials
section: Questions SM2.2, SM2.3, and SM2.5.

From the textbook, Questions 2.14, 2.25 and 2.29.