AAT L2 Elements of Costing 1 — Questions and Answers
Question 1: Which of the following is classified as a direct cost?
- Factory rent
- Raw materials used in production (Correct answer)
- Office stationery
- Salary of the managing director
Correct answer: Raw materials used in production
Direct costs can be directly attributed to a specific unit of production. Raw materials used in manufacturing a product are a direct cost because they can be traced to individual units. Factory rent is an indirect cost as it cannot be attributed to specific units.
Question 2: The formula for calculating total cost is:
- Direct costs + Indirect costs
- Fixed costs + Variable costs
- Direct materials + Direct labour + Overheads
- All of the above are correct (Correct answer)
Correct answer: All of the above are correct
Total cost can be expressed in multiple ways: as direct costs plus indirect costs (overheads), as fixed costs plus variable costs, or as direct materials plus direct labour plus overheads. All three formulas produce the same total cost figure.
Question 3: A variable cost is one that:
- Stays the same in total regardless of output
- Changes in total in direct proportion to the level of activity (Correct answer)
- Changes per unit as output changes
- Is always a direct cost
Correct answer: Changes in total in direct proportion to the level of activity
Variable costs change in total in direct proportion to the level of output or activity. If production doubles, total variable costs double. However, the variable cost per unit remains constant. Examples include raw materials and direct labour paid per unit.
Question 4: Factory supervisors' salaries are classified as:
- Direct labour costs
- Production overheads (indirect costs) (Correct answer)
- Administrative overheads
- Selling and distribution costs
Correct answer: Production overheads (indirect costs)
Factory supervisors oversee the production process but do not work directly on individual products. Their salaries cannot be directly attributed to specific units of output, making them an indirect cost classified as production overhead.
Question 5: A semi-variable cost:
- Is always fixed
- Has both a fixed element and a variable element (Correct answer)
- Only changes when output exceeds a certain level
- Is the same as a stepped cost
Correct answer: Has both a fixed element and a variable element
A semi-variable (mixed) cost has both a fixed component (incurred regardless of activity) and a variable component (changes with activity level). For example, a phone bill with a fixed monthly line rental plus variable call charges.
Question 6: Which of the following is an example of a fixed cost?
- Direct materials
- Sales commission per unit sold
- Annual insurance premium for the factory (Correct answer)
- Packaging materials
Correct answer: Annual insurance premium for the factory
An annual insurance premium is a fixed cost because it remains the same regardless of the level of production or sales activity during the year. Direct materials, sales commission, and packaging are variable costs that change with activity.
AAT L2 Elements of Costing 1
Which of the following is classified as a direct cost?