Elements of Costing Flashcards
6 cards from real AAT L2 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Elements of Costing flashcards as text
Absorption costing differs from marginal costing because it:
Answer: Includes fixed production overheads in the cost per unit
Absorption costing includes a share of fixed production overheads in the cost of each unit produced, whereas marginal costing only includes variable costs in the unit cost. This affects inventory valuations and reported profit.
If a business produces 20,000 units and sells 18,000 units using absorption costing, the closing inventory will include:
Answer: Variable and fixed production costs for 2,000 unsold units
Under absorption costing, both variable and fixed production costs are included in the cost per unit. The 2,000 unsold units in closing inventory carry their full production cost (variable + an absorbed share of fixed costs).
An overhead absorption rate (OAR) based on machine hours is most appropriate when:
Answer: Production is predominantly machine-intensive
A machine hour OAR is most suitable when production is machine-intensive because machine time is the main driver of overhead costs. Using machine hours as the basis fairly allocates overheads to products based on the resource that causes them.
A manufacturing account is used to calculate the:
Answer: Cost of goods manufactured
A manufacturing account calculates the total cost of goods manufactured during a period. It starts with raw materials, adds direct labour and production overheads, and adjusts for work-in-progress to arrive at the cost of finished goods produced.
Which of the following would be included in a product cost but NOT a period cost?
Answer: Factory machinery depreciation
Factory machinery depreciation is a production overhead and is included in the product cost (cost of manufactured goods). Product costs are attached to inventory until the goods are sold. The other items are period costs expensed in the period they are incurred.
The margin of safety represents:
Answer: The difference between actual or budgeted sales and the break-even point
The margin of safety is the difference between actual (or budgeted) sales and the break-even sales level. It indicates how much sales can fall before the business starts making a loss. It can be expressed in units, revenue, or as a percentage.