Cost Accounting Principles, Concepts and Techniques

This article covers various topics related to cost accounting principles, concepts and techniques. It includes solved problems on direct labour cost, budget preparation cycle, overhead absorption rate, management accounting system, capital investment appraisal methods, costing, and more. The article is suitable for students studying Cost Accounting and related courses in universities and colleges.

Cost Accounting

Contents
Part 1 – Cost accounting principles, concepts and techniques...................................................3
Part 2 – Cost Accounting Techniques......................................................................................12
31. a) Compute the payback for both the Edinburgh and Newcastle upon Tyne contracts. 12
31. b) Critically analyse the payback technique...................................................................13
31. c) Define the features of investment appraisal techniques, pros and cons of IRR.........13
REFERENCES.........................................................................................................................16

Part 1 – Cost accounting principles, concepts and techniques
1. Eberle Ltd. uses direct labour cost as a basis for computing its predetermined
overhead rate. In computing the predetermined overhead rate for last year, the
company misclassified a portion of direct labour cost as indirect labour. The effect of
this misclassification will be to:
a) understate the predetermined overhead rate.
b) have no effect on the predetermined overhead rate.
c) cannot be determined from the information given.
d) overstate the predetermined overhead rate.
2. In the budget preparation cycle, the first budget to be prepared is usually the:
a) Production budget
b) Direct materials budget
c) Direct labour budget
d) None of the above
3. A company uses an overhead absorption rate of £6·50 per labour hour, based on
40,000 budgeted labour hours for the period. During the same period the actual total
overhead expenditure amounted to £265,442 and 42,000 labour hours were recorded
on actual production.
By how much was the total overhead under or over absorbed for the period?
a) Under absorbed by £7,558
b) Under absorbed by £5,442
c) Over absorbed by £7,558
d) Over absorbed by £5,442
4. Given that the closing work-in-progress of a process is 400 units, which is 100%
complete with regards to materials and 50% complete with regard to conversion
costs, the equivalent units will be:
a) Materials 200, conversion 200
b) Materials 400, Conversion 200
c) Materials 400, conversion 100

d) Materials 600, conversion 200
5. Wages paid to a labourer who is engaged in production activities should be classified
as:
a) direct costs
b) indirect cost.
c) sunk cost.
d) imputed cost
6. Which of the following describes the purpose of a management accounting system?
a) Recording the historical financial transactions of a business
b) Preparation of annual financial statement
c) Record statements for external stakeholders
d) Preparation of plans for the future direction of a business
7. Toews Ltd has prepared the following flexible budget for the coming year. The
Budgeted level of activity is 7,500 units.
£
Sales 250,000
Direct material 75,000
Direct labour 60,000
Variable overheads 30,000
Fixed overheads 45,000
Profit 22,500
If the budget is flexed to a level of activity of 10,000 units, what would the total
budgeted cost be?
a) £280,000
b) £265,000
c) £123,750
d) £168,750
8. Which one of the following statements is correct regarding capital Investment
appraisal methods?

a) The Payback period takes into account all the cash flows accruing to the project
b) The Net Present value method does not take the time value of money into account
c) The Accounting Rate of Return takes the time value of cash flows into
consideration and is the one most often used in practice by business organisations
d) The Internal Rate of Return is the discount rate at which the net present value is
zero
9. An adverse labour efficiency variance together with a favourable labour rate
variance could suggest that?
a) The business is paying a higher hourly rate than standard
b) More products are being made per hour
c) Less labour hours are needed to make the same amount of output
d) Less skilled staff are being used in production
10. Management accounting is primarily concerned with:
a) Providing statutory information for external use
b) Providing internal information for use by management
c) Providing tax advice for internal use
d) Providing financial information only for use by management
11. Slip Heel Ltd manufactures two types of shoes in its factory. A typical monthly
budget is as follows:
Shoe Type I Shoe Type II
Monthly output 5,040 units 10,560 units
Time per unit 24 minutes 36 minutes
Unavoidable non-productive time is 25% of productive time and is paid £9 per hour.
Operatives are paid £8 per unit of shoe type I produced and £14 per unit of shoe type II.
What would be the monthly cost of operatives’ wages in the factory?
a) £93,960
b) £188,160
c) £206,952
d) £214,368

12. Which TWO of the following would be regarded as cost objects?
a) A branch of a high street chemists
b) An accounts department
c) Wood used in making a chair
d) Rent paid on a factory
13. At the beginning of June there were 500 Widgets held in the stores. 200 of these
Widgets had been purchased for £12.50 each in May and 300 had been purchased for
£13 each in April.
On 15th June a further 150 Widgets were received into stores at a purchase cost of
£13.20 each.
The only issue of Widgets in June occurred on the 25th, when 90 units were issued to
production.
Using the FIFO valuation method, what was the value of the opening inventory of
Widgets on 1st July?
a) £1,070
b) £1,188
c) £7,192
d) £7,210
14. Budgets identify, gather, summarise, and communicate:
a) Financial data only.
b) Financial and non-financial data.
c) Non-financial data only.
d) None of these.
15. Given the following cost and activity observations for Leno Enterprises' utilities,
use the high-low method to calculate Leno's variable utilities cost per machine hour.
Cost Machine Hours
September £4,100 22,000
October £3,700 18,000
November £3,900 19,000
December £4,500 28,000

a) £0.08
b) £4.86
c) £0.25
d) £12.50
16. The following information is available for the two production departments
(machining and assembly) and one service department (the canteen) at a
manufacturing company.
Machining Assembly Canteen
Budgeted overheads £25,000 £20,000 £11,000
Number of staff 30 20 5
After reapportionment of the service cost centre costs, what will be the overhead cost of
the assembly department cost centre?
a) £25,500
b) £24,400
c) £24,000
d) £4,400
17. Which of the following costs has no relationship with the level of output?
a) Semi-variable costs.
b) Variable costs.
c) Stepped fixed costs.
d) Fixed costs.
18. Lee plc has prepared the following flexible budget for the coming year. The
budgeted level of activity is 5,000 units.
£
Sales 125,000
Direct material 37,500
Direct labour 30,000
Variable overheads 15,000
Fixed overheads 20,000
Profit 22,500

If the budget is flexed to a level of activity of 7,500 units, what would be the budgeted
total costs be?
a) £102,500
b) £110,000
c) £126,000
d) £143,750
19. Which ONE of the following statements concerning costing is correct?
a) The procedures used to calculate unit costs in manufacturing industries are not applicable
to service industries.
b) Within process costing the cost per unit of output is found indirectly by dividing total costs
by the number of units produced.
c) In process and job costing the cost per unit of output is found directly by accumulating
costs for each unit.
d) Costing is irrelevant because the same level of detailed information can be extracted from
the financial accounts.
20. The following cost details relate to one unit of product Alphatron.
Variable materials
£ per unit
23.52
Variable labour 20.88
Production overheads
Variable 3.24
Fixed 22.46
Selling and distribution overheads
Variable 17.98
Fixed 8.16
Total cost 96.24
In a marginal costing system, the value of a closing inventory of 3,400 units of
Alphatron will be:
a) £327,216
b) £238,339

c) £223,107
d) £161,976
21. An insurance company pays its employees a commission of 6 percent on each
sale. What is the proper classification of the cost of sales commissions?
a) Constant cost.
b) Variable cost.
c) Mixed cost.
d) Fixed cost.
22. SecuriPrint Ltd produces pre-printed cheques for customers to use in automated
account payable departments. The cheques include personalised customer details. A
new customer has ordered a batch of 3,000 cheques. The following data illustrate
SecuriPrint’s cost for a typical batch of 1,000 cheques:
£
Variable materials 72.00
Variable wages 24.00
Machine set up (fixed per batch *) 7.20
Design and artwork (fixed per batch *) 36.00
139.20
* The design and machine set up costs are fixed per batch regardless of the batch size.
SecuriPrint absorbs production overhead at a rate of 10% of variable wages cost. A
further 5% is added to the total production cost of each batch to allow for selling,
distribution and administration overhead.
SecuriPrint requires a profit margin of 40% of sales value. The selling price for a batch
of 3,000 cheques should be:
a) £743.40
b) £592.20
c) £579.60
d) £497.45
23. Citricacid plc budgets during its first year of operations to produce and sell
38,160 litres of product per annum at a selling price of £10 per litre.

Citricacid’s budgeted costs are as follows:
£ per unit
Variable production costs 3.54
Fixed production costs 1.04
Variable selling costs 2.50
In the first year the unit selling price was £10 per litre and the variable unit cost and
expenditure on fixed production costs were also as budgeted. Actual sales volume was
38,400 litres and closing inventory was 960 litres.
Using absorption costing Citricacid’s profit for the year was:
a) £113,376
b) £112,378
c) £112,128
d) £110,880
24. The standard direct labour cost of product C is as follows: Three hours of skilled
labour at £4 per hour is equal to £12 per unit of product C.
During the current period, 800 units of the product were made, and the skilled direct
labour cost was £10,200for 2,000 hours worked.
Based on the above information, what was the direct labour total variance?
a) £600 Adverse
b) £800 Adverse
c) £600 Favourable
d) £800 Favourable
25. Which one of the following are NOT period costs?
a) Advertising costs.
b) Indirect materials.
c) Product design costs.
d) Direct materials.
26. Butterfly Limited has finalised its budget for 20X8 and sales are anticipated to
be
£243,600 in January, £1,393,200 in February, £516,000 in March and £769,200 in April.

Butterfly is budgeting that 50% of sales will be cash and the other 50% will be on credit
when 80% of receivables are expected to pay in the month after sale, 15% in the second
month after sale, while the remaining 5% are expected to be bad debts.
Credit customers who pay in the month of sale can claim a 5% cash settlement discount.
What level of sales receipts should be shown in the cash budget for March 20X8?
a) £820,650
b) £833,550
c) £1,425,432
d) £1,438,332
27. A combined set of operational budgets and a set of financial budgets for the
entire organisation is known as a:
a) Master budget.
b) Flexible budget.
c) Month-to-month budget.
d) Continuous budget.
28. Which of the following best describes a Joint-Product?
a) It is the expected loss in the efficient production of products.
b) It is that part of the output of a process which produces one or more products which
have relatively low sales values.
c) It is that part of the output of a process where two or more products are produced
which have substantial sales value to a business.
d) It is what happens when production is less efficient than expected and the actual
loss is greater than expected.
29. Financial budgets include:
a) Pro forma statements, a sales budget, and a cost of goods manufactured budget.
b) A budgeted income statement and budgeted balance sheet only.
c) A budgeted income statement, budgeted balance sheet, and cash budget.
d) Pro forma statements, a capital expenditures budget, and a cash budget.
30. A company uses the first-in-first-out (FIFO) method of valuing inventory and
makes the following purchases and issues of Material M.

Date Units
1 July purchase 400
8 July purchase 750
12 July purchase 700
22 July issue 950
30 July issue 400
The inventory valuation of Material M on July 31 is:
a) £1,190
b) £1,215
c) £1,225
d) £1,200
Part 2 – Cost Accounting Techniques
31. a) Compute the payback for both the Edinburgh and Newcastle upon Tyne contracts.
Edinburgh Newcastle
Year Cash flows Cumulative Cash
flows
Cash flows Cumulative Cash
flows
0 (12820) (12820) (11840) (11840)
1 3,780 (9040) 3,500 (8340)
2 4,150 (4890) 3,850 (4490)
3 4,550 (340) 4,200 (290)
4 5,120 4780 5,150 4860
5 4,900 + 110 =
5010
9790 4,950 + 95 = 5045 9905
Payback Period = Last period with negative cumulative cash flow + (Absolute value of
cumulative cash flow at the end of negative cash flow period / Total cash flow in the
year after negative cumulative cash flow)
Edinburgh = 3 + (340 / 5120)
= 3 + (0.066 * 12)
= 3 + 0.7
= 3.7 years or 3 Years and 7 Months
Newcastle = 3 + (290 / 5150)

= 3 + (0.056 * 12)
= 3 + 0.6
= 3.6 Years or 3 years and 6 Months
31. b) Critically analyse the payback technique.
Based on the above calculation, the payback period is calculated which helps to find out the
duration require to cover the cost of an investment. Every organisation plough funds in some
projects to get the good returns. The payback period is calculated by taking initial investment
and divide by the average annual inflows (Shapovalova, 2019).
There are some advantages of payback period which can be described as below:
 The project which is having shorter payback period helps in managing the cash flow
of the organisation effectively. There are various firm which depends on cash, the
time period of return is vital for the organisation.
 The prompt returns on investment allows the firm to invest in better sources.
There are certain disadvantages of payback period which can be described as given below:
 It is a traditional form of investment appraisal technique which does not consider the
time value of the money.
 It does not take into account the life of the asset and cash flow generated by the
project.
31. c) Define the features of investment appraisal techniques, pros and cons of IRR.
Investment appraisal techniques are used for finding out that which project is best for the
company. It could be assessed through the following feature of the investment appraisal
techniques.
 The return is computed on the specific amount of investment made for the proposal of
the company.
 The future expenditures and the benefits that are estimated throughout the lifetime of
the project (Pleis, 2019).
The expense and advantages of a proposed capital project plan must be considered over
the project's approximation life cycle at the time of appraisal. It can be explained as estimated
useful life cycle of non-current assets that is being consumed for a longer period of time. It
further stares that ascertaining future related benefits and costs will be helpful in long time
forecasting. A complex plan takes in account the urgent usage of a non-current asset. Further,

the asset is taken is put to use for a definite quantity of years, though during this duration it
helps to raise sales or cutting down operating expenses. There would be cost of recurring
nature involved which would be linked with investment too. At the ending of asset life cycle
on economic grounds it is possible that it would possess a scrap value as well. It can be
offered or dismantled to secondary markets for reference. (Cars and printing machine can
serve as a good example which have a large residual worth as well).
The challenge that is of estimating the future income, saving and expenditure might be
inaccurate by some methods. Because in some of the methods the cost of capital is not
utilised. The organisation should always neglect the non - existing assets which are over
optimistic and comprises of unrealistic expectations (Andersen, 2018).
Advantages of IRR:
1. It considers time value of money: The calculation of IRR considers the time value of
money by using discounting factor which converts the future inflows in their present
values.
2. IRR higher than cost of capital is considered as more appropriate for any project to be
accepted.
3. It is not compulsory for any project to calculate risk associated with the IRR. The
probability of inaccurate risk is reduced as it does not consider this element.
Disadvantages of IRR method: There are numerous limitations of IRR method which can be
described as given below:
 It does not consider the fair financial value. The reason for the same is IRR of 50% is
greater than the IRR of 18%. The technique of IRR will give emphasis on later project
which is having a less advantage in terms of finance (Santos Ospina, 2020).
 When an organisation is using the IRR approach, it is obvious that the project's future
cash flows which are positive are reinvested at IRR for a specific period of time. A
project which carries low IRR, takes low rate of return on the invested amount. On the
other hand, a project which is having high IRR takes high returns on the project.
 There are certain situations in which the results give contradictory outcome. A
mutually exclusive project is the one in which one project is selected and other is
rejected. When hotel or business complex is constructed on a specific plot of land.
There can be problems in knowing which projected is to be selected. There are
multiple rates which creates ambiguity and hit & trial method is required to be
adopted for the same (Chadda and Vardia, 2020).

REFERENCES
Books and Journals
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pp.69-94.
Berkau, C. and Berkau, K.S., 2018. Basics of Accounting: Part 2: Managerial Accounting.
UVK Verlag.
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Assets: A Study of Impact of IFRS Adoption. Journal of Commerce and Accounting
Research. 9(4). p.63.
Hogle, L.F., 2019. Accounting for accountable care: Value-based population health
management. Social Studies of Science. 49(4). pp.556-582.
Krutova, A and et.al., 2020. Strategic management accounting as an information basis of
effective management of enterprise activities. Academy of Accounting and Financial
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Program to Various Professional Certifications. Business Education Innovation
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Santos Ospina, A.C., 2020. New development: Budgetary accounting in Colombia—
arguments for a much-needed reform. Public Money & Management. 40(7). pp.523-
526.
Shapovalova, E., 2019. THE CONTROL OF BUSINESS PROCESSES BASED ON
INFORMATION OF MANAGEMENT ACCOUNTING. In RUSSIAN ECONOMY:
GOALS, CHALLENGES AND ACHIEVMENTS (pp. 294-297).
(Shapovalova, 2019) (Pleis, 2019) (Andersen, 2018) (Santos Ospina, 2020) (Chadda and
Vardia, 2020)