Problem 1 - Use of management accounting terminology

A company is selling an old machine which has book value of £50,000 -

this is a SUNK cost.

As an alternative to the old machine the firm can rent a new one at £3,000
p.a. - in terms of cost behaviour this is a FIXED cost

The firm pays the machine minders a salary plus a bonus per unit. The
total is a SEMI - VARIABLE cost

As an alternative, a flat salary is proposed. One machine would be used

at low demand, two when expansion occurs, three in peak periods. The
total operator cost is now a SEMI FIXED cost.

The old machine could be sold for £15,000. If the old is retained and used,
then the £15,000 is an OPPORTUNITY cost

To use the old machine further it must be repaired. For the decision to
retain, the repair cost is an INCREMENTAL OR RELEVANT cost

The machine is charged to departments at £25 per hour. In evaluating

departments the charge is a CONTROLLABLE COST (for the hours
used), but UNCONTROLLABLE ( for the cost per hour).
Problem 2 - Cost classification

A company prints books and magazines. The following expenses have

arisen in a particular month. You are to classify them under traditional cost
accounting headings.
Probably!!
1) Glue for binding DM
2) Ink for print DM
3) Wages of printing machine minders DL
4) Finance manager's salary IA
5) Wages of paper storeman IL
6) Print manager's car expenses IE
7) Cost of delivery of paper DM
8) Maintenance of binding machines IE
9) Factory telephones IE
10)Copyright on books published (on a per book basis) DE
11)Repairs to office block IA
12)Overalls for printers IE
13)Interest on loan IF
14)Fuel for representatives' cars. IS
15)Fuel for fork lift trucks in printing works IE
16)Business rates (1/4 for site is office, rest is printworks) ¼ IA
¾ IE
17)Equipment insurance (2/3 of equipment value is in the printworks)
2/3 IE
1/3 IA
18)Salaries of printworks supervisors IE
19)Cost of reps cars IS
20)Electricity for office computer IA
21)Boxes to pack magazines in DM
22)Wages of packers DL
23)Advertising IS
24)Cost of factory extension It’s an asset!
Depreciation
would be IE
25)Cost of factory roof repairs IE
26)Xmas bottles of plonk for customers IS
27)Bad debts IF
28)Finance officers salaries IA
29)Cleaners' wages IE if factory
30)Lubricants for factory machinery IE

Use these categories

Direct costs - Materials (DM)

Labour (DL)
Expense (DE)
Indirect costs - Factory
Materials (IM)
Labour (IL)
 Expense (IE)
Indirect costs - general
Administration (IA)
Marketing, selling and distribution (IS)
Finance (IF)