Question

Question 1

1. Differentiate between the concept of “cost accumulation” and “accumulated costs”. [4 marks]
2. Differentiate between the cost behaviour of fixed versus variable costs.[4 marks]

Question 2

Explain why it is important for a cost accountant to identify properly the cost drivers for the purpose of cost estimation.[8 marks]

Question 3

Explain the various categories of environmental costs.[8 marks]

Question 4

Explain why businesses are encouraged to adopt Activity Based Budgeting. [8 marks]

Question 5

Explain why many companies use absorption costing for their internal reporting. [8 marks]

Answer 1

Question 1

a.

Cost accumulation involves the use of formal cost accounting systems to collect cost information. By collecting and analyzing cost information, management can make more informed decisions about the operations of a business. It is a collection of costs in an organized fashion by means of a cost accounting system.

The value obtained by adding the external cost i.e, the cost of assembling or manufacturing constituent items) to the internal cost of the item itself is called Accumulated Cost. A process costing system accumulates costs when a large number of identical units are being produced.

b.

Fixed costs are those which do not change with the level of activity within the relevant range. These costs will be incurred even if no units are produced. For e.g., Rent, Depreciation expenses, etc. Fixed cost per unit decreases with the increase in production.

Variable costs change in direct proportion to the level of production. This means that the total variable cost increase when more units are produced and decreases when fewer units are produced. For e.g., Material, labor, etc

Question 2

Cost estimation in project management is the process of forecasting the cost and other resources needed to complete a project within a defined scope. Cost estimation accounts for each element required for the project and calculates a total amount that determines a project's budget.

Cost driver triggers a change in the cost of an activity. Cost drivers allows a company to analyze all cost estimations. A company can differentiate among costs that drive overhead and value, those that do not drive overhead but still add value, and those that may or may not drive the overhead but do not add any value.

Question 3

Following are the various categories of environmental costs:

• Material costs of Product Outputs:

Include the purchase costs of natural resources such as water and other materials that are converted into products, by-products, and packaging.

• Waste and Emission Control Costs:

Include cost for: Handling, treatment, and disposal of Waste and Emissions; remediation and compensation costs related to environmental damage.

• Prevention and other environmental costs:

Include the costs of preventive environmental management activities such as cleaner production projects.

• Research and Development Costs:

Includes the cost of research and development projects related to environmental issues.

Question 5

Absorption costing compliance with GAAP and does a better job of accurately tracking profits than variable costing. Absorption costing is the required inventory method for external financial reporting in most countries. Many companies used absorption costing for internal accounting as well because:

• It is cost-effective and less confusing fro managers to use one common method of inventory costing for both external and internal reporting and performance evaluation.
• It can also prevent managers from taking actions that make their performance measure look good but that hurts the income they report to shareholders.
• It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory.