Cost Centre in Different Types of Departments

This document discusses the concept of cost centres in different types of departments in a business. It explains the difference between profit centres and cost centres and provides examples of departments that fall under each category. The document also covers the classification of costs in a case study and provides a table showing fixed costs, variable costs, total costs, and unit costs at different activity levels for a dog training service.

MODULE 1 UNIT 2
Activity submission

Learning outcomes:
LO3: Describe a cost centre in a particular type of business.
LO4: Summarise the differences between fixed, variable, mixed, and semi-fixed costs.
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2. Mark allocation
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to show you the weighting and length of each question.
Question 1 10
Question 2 4
Question 3 4
Question 4 6
Question 5 9
TOTAL 33
3. Questions
Question 1
Look at the following list of different types of departments, or units, in a business:
 A walk-in branch of a national bank called Bitcoiner Bank.
 A department responsible for marketing a toy company’s product.
 A group of people within a business who research new ventures for the company to
consider.
 A department that mainly sells insurance products on behalf of the company.
Describe what a cost centre is and with reasons indicate which of the departments listed
above are cost centres and which are not. (Max. 16lines)
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Cost centre refers to department or unit within the organization that have been
established with the aim to contribute in the profitability of the company but indirectly. The
cost centre cost organization money to operate but does not directly adds to profit. So it can
be said that cost centre is business unit within the organization which cost the money but
does not take in any income. On the apparent profit centre add income as well as cost to the
organization. Cost centre main objective is to carry out specific functions that support
organization primary functions. For example, a company who involved in manufacturing
selling of laptops will have sales department that adds to the income and also have
customer call centre that supports the primary activity through helping the customer but
does not adds any income to the company.
Classification of each of given departments as cost centre or not with valid reasons:
 A walk-in branch of a national bank called Bitcoiner Bank: The walk in branch of any
national bank refers to department which is established to provide all the banking
facilities to their customers such as deposits, loans, and all other banking functions.
So this department incurs cost as well as earns profit in form of interest on deposits,
loan interest and other incomes. So it can be said that this department is profit
centre not a cost centre.
 A department responsible for marketing a toy company’s product: The function of
marketing department is to promote the company products as in this promoting of
toys for its company. Generally this department does not take in any input in form of
income but has output in form of marketing expenses. It is the reason why this
department is regarded as cost centre.
 A group of people within a business who research new ventures for the company to
consider: Research department only takes in cost but not take in any income that
has been earned by the company. So the research department will incur cost and is
regarded as the cost centre.
 A department that mainly sells insurance products on behalf of the company: This
department will incur cost but also earn income on the product sold so it is not the
cost centre.
Question 2
Name four activities that could be used as cost centres for a company that manufactures
windows. (Max. 5 lines)
Start writing here:
The four activities that could be used as cost centers for company that
manufactures windows are as follows:
 Human Resource Department: The costs incurred are in selection,
recruitment and training of employees
 Marketing Department: Costs incurred for advertisements and promoting the
products or services before the customers
 Research and Development Department: Involves incurring higher costs for
R&D activities to design new windows and achieve higher sales
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 Quality Department: Inspecting the quality of the windows for assuring the
products developed are able to meet the customer satisfaction level
Question 3
The accountant at Phillip’s Pies has been inconsistent in accounting for the company
president’s salary. You notice that sometimes he has accounted for the company president’s
salary as an overhead and at other times, the accountant has debited the salaries and wages
expense (i.e. direct labour) instead of overhead. When you confront the accountant about
the inconsistency, he gets somewhat defensive and says that it doesn’t matter which
method is used because both methods result in an expense, and net income will be the
same either way.
3.1 Assuming that the company president’s tasks are exclusively administrative, do you
agree with the accountant? Why or why not? (Max. 4 lines)
I do not agree with the accountant view of treating the expenses related to the
president salary in either overhead or as salary and wages mean direct cost. It is important
each and every cost must be classified according to nature and its behaviour. It is because
while making the management decisions such as cost benefit analysis, breakeven point,
marginal costing analysis there will be issues in making the decisions.
3.2 Which accounting entry is correct (overhead/direct labour)? Why? (Max. 3 lines)
President salary falls under the administrative expenses and it is not directly related
to cost of making the product. So it is important to classify the administrative expenses
under the overhead expenses and do not allow it to classify it under the salary and wages
(Direct cost). Salary of president does not amount and linked to the direct cost of
manufacturing the products in Philips Company.
Question 4
Read the following case study and answer the question that follows.
Thandi’s Treats, a biscuit and cookie manufacturer, employs a management accountant to
ensure all their accounts are in order. The management accountant does some research and
finds the following costs for the past month of production:
10kg flour
6 cartons of eggs
3kg butter
3kg castor sugar
500g salt
1 bottle of vanilla extract
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1kg chocolate chips
Electricity – R1,000.
Supervisor’s salary – R5,000
2 x production assistants’ salaries – R9,900
Rates and water for the month – R1,500
Insurance on machinery – R1,000 per month
Rent – R7,000 per month
Use the following table to identify which types of costs the above elements fall under. If
there is no cost applicable, put “not applicable” in the relevant block. Provide only one
example per cost category.
Note: A particular cost may fit into two categories of costs. For example, a cost can be direct
in terms of its nature and variable in terms of its behaviour.
Type of cost Case study example
Direct cost 10kg flour, 6 cartons of eggs, 3kg butter, 3kg castor sugar, 500g
salt, 1 bottle of vanilla extract, 1kg chocolate chips
Indirect cost Electricity – R1,000, Supervisor’s salary – R5,000, 2 x production
assistants’ salaries – R9,900, Rates and water for the month –
R1,500, Insurance on machinery – R1,000 per month, Rent –
R7,000 per month
Fixed cost Supervisor’s salary – R5,000, 2 x production assistants’ salaries –
R9,900, Rates and water for the month – R1,500, Insurance on
machinery – R1,000 per month, Rent – R7,000 per month
Variable cost 10kg flour, 6 cartons of eggs, 3kg butter, 3kg castor sugar, 500g
salt, 1 bottle of vanilla extract, 1kg chocolate chips
Semi-fixed cost Electricity – R1,000
Mixed cost Not Applicable as fixed component and variable component of
defined fixed cost is not given
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Question 5
Easyboy! is a dog training service that provides hour-long sessions to help owners control
their pets. The business charges per session, so they use sessions as their units of output.
The following table contains accurate data based on one month, and needs to be completed
for various activity levels. Complete the table, showing fixed costs, variable costs, total costs,
and unit cost at the different activity levels (numbers of sessions). Show all amounts to the
nearest R.
Sessions Fixed cost Variable cost Total cost Unit cost
100 R 2,000 R 2,000 R 4,000 R 40
150 R 2,000
R 3000
(R2000*150/100
)
R 5000 R 33.33
200 R 2,000
R 4000
(R2000*200/100
)
R 6000 R 30
250 R 2,000
R 5000
(R2000*250/100
)
R 7000 R 28
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