P 1.

1
Cost can be classify by following,

Element cost are classify as materials, Labour and Expenses

Function-cost are classify as being production and non-production

Nature-cost are classify as being direct and indirect

Behaviour-cost are classify as being variable, fixed , stepped fixed and semi-variable

Element

Materials- There are cost of purchases of raw materials that are used in the
manufacturing

Process in the cost of goods that are to be resold in many organisations.

Labour: There are costs of staff which are directly involved in production.

Expenses/Overhead: These are cost incurred in the organisation other than materials
and labour costs.

(E.g. rent, rates, heating, lighting and insurance)

Function

Production cost: These are costs which are incurred when materials are converted into
finished good.

Non-production cost: These are costs that are not directly associated with the
production of the business output, such as administrative, selling and distribution
costs.

Nature

Direct costs: These are costs which can be directly identified with specific goods.
Direct costs comprise direct materials, labour and overhead.

Indirect cost: These are costs which cannot be directly identified with a specific cost
unit. Indirect costs may be either fixed or variable.

Behaviour

Variable costs: Variable costs are cost that change in proportion with the level of
output.

Fixed costs: Fixed costs is a costs that remains constant in total regardless of changes
in the level of activity.

(Will Seal Ray H. Garrison Eric W. Noreen Management Accounting Third Edition p34)

Semi-variable costs- These are costs that contain both fixed and variable elements.
Stepped Costs: These are costs that is only fixed within particular level of activity, but
which can rise to a higher level if activity goes beyond that range.(E.g. Supervisor
Salaries)

1;1b Buccaneers Ltd are used Classification by NATURE, because they only have Direct
material, Direct labour, Indirect materials and indirect labour. This is a classification
that is based on how cost react produced.

P1.2 The different costing method are as following

Unit costing
Job costing
Contract costing
Batch costing
Operating costing
Process costing
Multiple costing
Uniform costing

Unit costing: This method is also known as "single output costing." This method of costing is used for products
that can be expressed in identical quantitative units. Unit costing is suitable for products that are manufactured
by continuous manufacturing activity: for example, brick making, mining, cement manufacturing, dairy
operations, or flour mills. Costs are ascertained for convenient units of output.
Job costing: Under this method, costs are ascertained for each work order separately as each job has its own
specifications and scope. Job costing is used, for example, in painting, car repair, decoration, and building
repair.
Contract costing: Contract costing is performed for big jobs involving heavy expenditure, long periods of time,
and often different work sites. Each contract is treated as a separate unit for costing. This is also known as
terminal costing. Projects requiring contract costing include construction of bridges, roads, and buildings.
Batch costing: This method of costing is used where units produced in a batch are uniform in nature and
design. For the purpose of costing, each batch is treated as an individual job or separate unit. Industries like
bakeries and pharmaceuticals usually use the batch costing method.
Operating costing or service costing: Operating or service costing is used to ascertain the cost of particular
service-oriented units, such as nursing homes, busses, or railways. Each particular service is treated as a
separate unit in operating costing. In the case of a nursing home, a unit is treated as the cost of a bed per day,
while, for busses, operating cost for a kilometer is treated as a unit.
Process costing: This kind of costing is used for products that go through different processes. For example, the
manufacturing of clothes involves several processes. The first process is spinning. The output of that spinning
process, yarn, is a finished product which can either be sold on the market to weavers, or used as a raw
material for a weaving process in the same manufacturing unit. To find out the cost of the yarn, one needs to
determine the cost of the spinning process. In the second step, the output of the weaving process, cloth, can
also can be sold as a finished product in the market. In this case, the cost of cloth needs to be evaluated. The
third process is converting the cloth to a finished product, for example a shirt or pair of trousers. Each process
that can result in either a finished good or a raw material for the next process must be evaluated s
P1.3 The appropriate techniques are as following
1: Marginal Costing or Variable Costing
2:Absorption Costing
3:Activity-based Costing
4:Standard Costing
1:Marginal Costing or Variable Costing-Those costs of production that vary with output
are treated as product costs. This would generally include direct materials, direct
labour and the variable portion of manufacturing overhead. Fixed manufacturing
overhead is not treated as a product cost under this method . Rather, fixed
manufacturing overhead is treated as a period cost and, like selling and administrative
expenses, it is charged off in its entirety against revenue each period. Consequently
the cost of a unit of product in stock or in cost of goods sold under the variable costing
method contains no element of fixed overhead cost.(Management Accounting Third
Edition by Will Seal, Ray H. Garrison and Eric W. Noreen p200)
2: Absorption Costing- absorption costing treats all costs of production as product
costs, regardless of whether they are variable or fixed. The cost of unit of product
under the absorption costing method therefore consists of direct materials, direct
labour, and both variable and fixed overhead. Thus, absorption costing allocates a
portion of fixed manufacturing overhead cost to each unit of product, along with the
variable manufacturing costs. Because absorption costing includes all costs of
production as product costs, it is frequently referred to as the full cost method.
(Management Accounting Third Edition by Will Seal, Ray H. Garrison and Eric W.
Noreen p200)
3:Activity-based Costing(ABC)- is a Costing method that is designed to provide
managers with cost information for strategic and other decision that potentially affect
capacity and therefore 'fixed' costs. Activity-based costing is also used as an element
of activity-based management, an approach to management that focuses on activities.
( Management Accounting Third Edition by Will Seal, Ray H. Garrison and Eric W.
Noreen p276)
4:Standard Costing- Standard costing is most suited to an organization whose
activities consist of a series of common or repetitive operations and the input
required to produce each unit of output can be specified. It is therefore relevant
in manufacturing companies, since the processes involved are often of a
repetitive nature. (Colin Drury Management and cost Accounting 7th Edition
p418)
P1:3b Looking at the case study Buccaneers are using Absorption Costing
because they have include maintenance cost , rent and rates, heating and
lighting, building insurance, machinery insurance and depreciation of
machinery to the total manufacturing costs.

P 1.4
(A) Allocate and
DETAILS BASIS OF TOTAL FORMIN MACHININ FINISHIN ADMINIST
G G G RA
APPORTIONME 000
NT 000 000 000 TION
000
INDIRECT Given 90 40 30 10 10
MATERIAL

INDIRECT Given 270 80 70 60 60

LABOUR
MAINTENAN Time 50 7.5 37.5 5 0
CE
RENT & Floor Space 100 40 30 20 10
RATES
HEATING & Floor Space 20 8 6 4 2
LIGHTING
BUILDING Floor Space 10 4 3 2 1
INSURANCE
MACHINING Machine 10 2 6 2 0
INSURANCE Hours
DEPRECIATIO Machine 120 24 72 24 0
N OF Hours
MACHINERY
SUBTOTAL 670 205.5 254.5 127 83
ADMINISTRATI Direct Hours 39.84 26.56 16.6 (83)
ON
GRAND TOTAL 670 245.34 281.06 143.6 0

Maintenance
000
Forming =15%x50 =7.5

Machining =75%x50 = 37.5

Finishing = 10%x50 =5

Rent & Rate

000

Forming =20/50x 100=40

Machining = 15/50x 100 =30

Finishing =10/50x 100 =20

Administration =5/50x100=10

Heating & lighting

000

Forming =20/50x20=8

Machining = 15/50x20=6

Finishing =10/50x20=4

Administration=5/50x20=2

Building insurance
000

Forming =20/50x10=4

Machining = 15/50x10=3

Finishing =10/50x10=2

Administration=5/50x10=1

Machinery Insurance
000

Forming =5/25x10-2

Machining = 15/25x10=6

Finishing =5/25x10=2

Depreciation of Machinery
000

Forming =5/25x12=24

Machining = 15/25x120=72

Finishing =5/25x120=24

Administration
000

Forming =180/375x83=39.84

Machining = 120/375x83=26.56

Finishing =75/375x83=16.6
P1.4 b OAR (Overhead Absorption Rate)

Labour Hours
Forming department=180,000/6=30,000

Machining department=120,000/6=20,000

Finishing department=75,000/6=12,500

Forming department=245,340/30,000=8.18

Machining department=281,060/20,000=14.05

Finishing department=143,600/12500=11.49

Machining Hours
Forming department= 245,340/5000=49.07

Machining department=281,060/15000=18.74

Finishing department=143,600/5000=28.72

P1.4c Full Cost of a Job

A: DIRECT MATERIAL

Forming department 40

Machining department 9

Finishing department 53

B: DIRECT LABOUR

Forming department (4hours x 6) 24

Machining department (4hours x6) 24

Finishing department (1hour x6) 6

54

C: OVERHEAD

Forming department (49.07 X 1Hour) 49.07

Machining department (18.74 x 2 Hours) 37.48

Finishing department (28.72 x 1 Hour) 28.72

115.27

TOTAL 222.27
P1.4 d