Elements of Costing Flashcards

A stepped cost is best described as:

Answer: A cost that remains fixed within a range of activity but increases to a new level when a threshold is passed

A stepped cost (step-fixed cost) remains fixed within a relevant range of activity. When output exceeds that range, the cost increases by a step to a new fixed level. For example, hiring an additional supervisor when production exceeds a certain volume.

Using the high-low method, the following data is available: highest output 8,000 units costing £28,000; lowest output 3,000 units costing £18,000. What is the variable cost per unit?

Answer: £2.00

Variable cost per unit = (Highest cost - Lowest cost) / (Highest output - Lowest output) = (£28,000 - £18,000) / (8,000 - 3,000) = £10,000 / 5,000 = £2.00 per unit.

Materials, labour, and overheads are classified according to:

Answer: Their element or nature

Classifying costs as materials, labour, and overheads is classification by element (or nature). This describes what the cost is. Costs can also be classified by function (production, admin, selling) or behaviour (fixed, variable).

A product sells for £60 and has a profit margin of 25%. What is the total cost of the product?

Answer: £45.00

A profit margin of 25% means profit is 25% of the selling price. Profit = £60 × 25% = £15. Total cost = Selling price - Profit = £60 - £15 = £45.

Labour costs paid on a piecework basis are classified as:

Answer: Variable costs

Piecework means workers are paid per unit produced. The more units produced, the higher the total labour cost — it varies in direct proportion to output. This makes it a variable cost.

A business has total costs of £120,000 at 15,000 units and £90,000 at 10,000 units. Using the high-low method, what are the total fixed costs?

Answer: £30,000

Variable cost per unit = (£120,000 - £90,000) / (15,000 - 10,000) = £30,000 / 5,000 = £6. Total fixed costs = Total cost - Variable costs at any level = £90,000 - (10,000 × £6) = £90,000 - £60,000 = £30,000.