Cost and Management Accounting

Fundamentals
Solutions to exercises in the book
Chapter 2: Basic cost accounting, cost classification, behaviour and
estimation

2.1 (a) Differential

(b) Sunk
(c) Opportunity
(d) Semi-variable
(e) Fixed
(f) Controllable
(g) Variable
(h) Relevant

2.2 (a) (i) High-low method

Variable cost per unit
= Difference in cost ÷ Difference in units
= (R80 – R40) ÷ (7 – 1)
= R6.67

Fixed cost = Total cost – Variable cost =

R80 – (R6.67 x 7) = R33.31

Total cost for August

y = a + bx
y = 33.31 + 6.67(10)
y = R100.01
2.3
Cost Behaviour Product/Period costs

Production man., salary Fixed Product

Concrete material Variable Product

Direct labour Variable Product

Depreciation: concrete mixer Fixed Product

Advertising signs Fixed Period

Container rentals Fixed Product

Admin: Mbali Portia Fixed Period

Security Fixed Product

2.4
R’000 R’000 R’000 R’000 R’000 R’000 R’000
Manufacturing Non-manu Fixed Variable
Direct Direct Over- facturing
materials labour heads
Salaries

61 000 61 000 61 000

Factory workers

55 000 55 000 55 000

Factory (management)
Sales staff 42 000 42 000 42 000

6 500 6 500 6 500

Security

2 500 2 500 2 500

Engineers
Depreciation
 1 600 1 600 1 600
Delivery vehicles

3 500 2 450 1 050 3 500

Buildings
Purchases from
creditors
7 000 7 000
Spare parts for factory
7 000
equipment

2 900 2 900 2 900

Grease and lubricants
Water and electricity

22 000 22 000 3 000 19 000

Factory

3 000 3 000 3 000

Warehouse*

4 000 4 000 4 000

Office
Other

3 500 3 500 600 2 900

Telephone (office)
6 500 6 500
Repairs (factory
6 500
equipment)
*Generally, manufacturing companies may include warehousing costs related to raw materials and
work in progress inventory as part of inventory costs. Such costs, therefore, become an asset until
the inventory is sold, at which point the asset becomes an expense (i.e. cost of goods sold).
Warehousing costs related to finished goods are included in period costs (expensed when incurred)
and are not included in inventory costs.

2.5
(a) product and mixed
(b) period and fixed
(c) product and variable
(d) product and variable
(e) product and variable
(f) period and fixed
(g) period and fixed
(h) period and variable

2.6 (a)

(i) DM + DL
= R 1 200 000 + R800 000
= R 2 000 000
(ii) DL + Man. O/h
= R800 000 + R300 000
= R1 100 000
(iii) Prime Cost + Man. O/h
= R2 000 000 + R300 000
= R2 300 000
(iv) Period Costs: R450 000

(b)

Month Units Cost (R)

Highest December 750 000 805 000

Lowest October 250 000 305 000
Difference 500 000 500 000

(i) Diff. in Cost ÷ Diff. in Units

= 500 000 ÷ 500 000
= R1 Variable cost per unit

December (R) October (R)

Total Cost 805 000 305 000
Less: Total Var. Cost 750 000 250 000
Total Fixed Cost 55 000 55 000
 (ii) 500 000 Units
Total Var. Cost R500 000
Total Fixed Cost R55 000
Total Cost R555 000

(iii) 100 000 Units

Total Var. Cost R100 000
Total Fixed Cost R55 000
Total Cost R155 000

2.7 (a) R17 625

Patients Cost (R)
High 1 260 18 650
Low 650 17 125
610 1 525

Obtain variable cost per patient as R1 525 ÷ 610 = R2.50 per patient
Therefore, fixed cost is R17 125 – R1 625 (R2.50 x 650) = R15 500
Variable cost for 850 patients would be R2.50 x 850 = R2 125 Therefore, total cost for 850 patients
= R17 625 (R15 500 + R2 125)
 (b)

Direct Indirect Varia- Fixed Semi- Stepped Manufactur Non-manu-

ble variable -fixed -ing facturing
overhead overhead

(i) ✓ ✓ ✓

(ii) ✓ ✓
(note 1)

(iii) ✓
(note 2)

(iv) ✓ ✓

(v) ✓ ✓ ✓

(vi) ✓ ✓ ✓ or ✓

(vii) ✓ ✓ ✓ or ✓

(viii) ✓ ✓
(note 1)

(ix) ✓ ✓ ✓

(x) ✓ ✓ ✓

(xi) ✓ ✓ ✓

(xii) ✓ ✓ ✓ ✓

(xiii) ✓ ✓ ✓
(note 3)

(xiv) ✓ ✓ ✓
(note 3)

(xv) ✓ ✓ ✓

Notes: 1 Fixed in short-term, variable in longer-term; can also be classified as stepped-fixed

2 Direct if traceable to specific products
3 Could also be semi-variable if depreciated on time and usage basis
2.8
(a) Prime cost
= Direct materials + Direct labour
= R520 000 + R256 000
= R776 000

(b) Variable production costs

= Prime costs + Variable indirect labour + Variable overheads
= R776 000 + (60% x R190 000) + R525 000
= R1 415 000

(c) Conversion cost

= Direct labour + Indirect labour + Total production overheads
= R256 000 + R190 000 + R525 000 + R401 000
= R1 372 000

(d) Total production cost

= Conversion costs + Direct materials
= R1 372 000 + R520 000
= R1 892 000

(e) Period cost

= Selling and distribution + Administration
= R196 000 + R98 000
= R294 000

(f) Total fixed costs

= (40% x Indirect labour) + Fixed overheads
= (40% x R190 000) + R401 000 + R204 000 + R102 000
= R783 000
 Fixed costs per unit
= Total fixed costs ÷ Number of units produced
= R783 000 ÷ 9 800 units
= R79.90

(g) Total variable cost when 10 000 units are produced

= 10 000 x R1 415 000
9 800
= R1 443 877.55

2.9 (a) Prime cost per unit

= (Direct materials + Direct labour) ÷ Total units produced
= (R180 000 + R220 000) ÷ 20 000 units
= R20 per unit

(b) Conversion costs

= Direct labour + Rent for factory building + Other manufacturing overheads
= R220 000 + R6 000 + R18 000 + R21 750
= R265 750

(c) Total period costs

= Commission paid to sales agent + Rent paid for sales
= R13 900 + R22 000
= R35 900

(d) Total fixed cost per unit

= [R6 000 + (R2 000 x 3) + R18 000 + R22 000] ÷ 22 000 units
= R2.36 per unit

(e) Total production costs

= Prime costs + Rent on factory building + Other manufacturing overheads
= R400 000 + (R6 000 + R6 000) + R18 000 + 21 750
= R451 750

0
2.10 (a) High-low method:

Month Production Semi-variable

volume (units) overheads (R)
Highest 1 020 11 900
Lowest 830 10 000
Difference 190 1 900

Variable cost = R1 900 ÷ 190

= R10 per unit
Fixed cost = Total cost – Variable cost
= R11 900 – (1020 x R10)
= R1 700
2.11

(a) Wages of factory canteen staff Indirect production overheads (indirect

(b) Purchase of wood
(c) Salespersons’ commissions
(d) Wages of machine operators
(e) Advertising expenditure
(f) Nails, glue, varnish used on the
furniture
(g) Depreciation of accountant’s laptop
computer
(h) Rates for factory
(i) Supervisor’s salary
(j) Royalties paid to designers
(k) Insurance for factory
(l) Director’s year-end party expenses
labour)
Direct materials
Non-manufacturing overheads (selling)
Direct labour
Non-manufacturing overheads (selling)
Indirect production overheads (indirect
materials)
Non-manufacturing overheads (admin)
Manufacturing overheads
Manufacturing overheads (indirect labour)
Direct expenses
Manufacturing overheads
Non-manufacturing overheads (admin)

2.12 (a) The wood used to build tables and the hardware used to attach table legs would be
considered direct materials. Small, inexpensive items like glue, nails and masking
tape are typically not included in direct materials because the cost of tracing these
items to the product outweighs the benefit of having accurate cost data. These minor
types of materials, often called supplies or indirect materials, are included in
manufacturing overheads, which we define in (c).

(b) Direct labour would include the workers who use the wood, hardware, glue,
lacquer and other materials to build tables.

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(c) Manufacturing overheads consist of the following:
• Indirect material costs – The cost of materials necessary to manufacture a product
that are not easily traced to the product or that are not worth tracing to the
product.
• Indirect labour costs – The cost of workers who are involved in the production
process but whose time cannot easily be traced to the product. For example,
supervisors in the production process, who oversee several different products and
are responsible for hiring employees, scheduling employees and ordering
materials, are considered indirect labour.
• Other manufacturing costs – These are all other costs for items associated with
the factory, including equipment maintenance, insurance, utilities and
depreciation.

(d) Examples of selling costs include advertising, sales commissions, salaries for
marketing and advertising personnel, office space for marketing and advertising
personnel, finished goods storage costs, and shipping costs paid by the seller for
products shipped to customers.

(e) Examples of administrative costs include personnel and support staff in the
following areas: accounting, human resources, legal, executive, and information
technology. Depreciation of office equipment and buildings associated with these
areas would also be included as general and administrative costs. General and
administrative costs are often simply called administrative costs.

(f) A sunk cost is any historic cost, i.e. it has been incurred as a result of a past
decision and is irrelevant for decisions still to be made. The down payment of
R50 000 represents a sunk cost.
An opportunity cost is the benefit foregone from choosing one alternative above
another and is relevant for decision-making. The lost profit of R16 000 p.a. [(5500 x
12) – 50 000] which could be earned from subletting the space is an example of an
opportunity cost.

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 (g) The relevant information for running the factory is:

R
Sales 1 000 000
Costs (870 000 – 50 000 sunk cost) 820 000
180 000
Less opportunity cost from subletting 16 000
Incremental profit 164 000

The above indicates that R164 000 additional profit will be obtained from using the
factory for cutting boards.

Summary of manufacturing costs

Direct materials
• Wood: cherry, maple, oak and mahogany
• Hardware: drawer handles
Direct Labour
• Workers who cut, plane and glue wood
• Workers who fill and sand tables
• Workers who stain and finish tables
Manufacturing overhead
• Indirect materials: glue, screws, nails, sandpaper, stain and lacquer
• Indirect labour: factory supervisors
• Other manufacturing costs: equipment maintenance, equipment depreciation, factory
utilities, factory insurance, factory building depreciation, and factory property taxes

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