Question

Q1. Explain the distinction between:

       (a) direct and indirect costs.

       (b) product and period costs.

       (c) fixed and variable costs.

Q2. Selling expenses are an example of product cost because they are incurred in relation to making

       sales of products. Discuss this statement, giving reasons as to whether you agree or disagree.

Q3. A company has fixed costs of $100 000 for a period, during which time 25 000 units of a product

       are sold.  Therefore, the fixed cost per unit is $4.00 ($100000/25000 units). This means that the

       fixed cost has become a variable cost of $4.00 per unit. Discuss this statement, giving reasons as

       to whether you agree or disagree.

Q4. Explain the importance of the relevant range in making decisions about cost behaviour.

Answer 1

Ans.-1 Difference between

Direct cost	Indirect cost
These are the specific cost which related to product or service means which is directly chargeable to that product or services These are mainly variable in nature For example, direct material, direct labour.	These are the cost which cannot be directly chargeable to any product or service, these are not specific cost to product or services These are mainly fixed in nature For example – Factory rent

Product cost	Period cost
These are the cost which are necessary for production and which will not be incurred if there is no production These are called inventoriable costs because these are included in cost of inventory	These are the cost which are not necessary for production and incurred even if there is no production These are written off as expense in the period in which these are incurred

Fixed cost	Variable cost
These are the cost which remain constant in amount up to a specified quantity of production Neither rise with the rise in production nor reduce with decrease in production	These are the cot which changes with the production changes They rise with rise in production and they reduce with decrease in production

Ans.2 Disagree with the statement

Product cost - These are the cost which are necessary for production and which will not be incurred if there is no production

These are called inventoriable costs because these are included in cost of inventory   

Mainly product cost consist these

Direct Material + Direct labour+ Overheads

Selling expenses are that cost which incurred after the production completed, to obtain order from customers, selling expenses never part of production so they are not product cost.

Ans.3 Fixed cost- These are the cost which remain constant in amount up to a specified quantity of    production Neither rise with the rise in production nor reduce with decrease in production ,

These costs are period cost which cannot directly chargeable to the product

Given $1,00,000 amount of fixed cost for 25,000 units , $ 4 per unit is not justifiable because fixed cost cannot directly charged to product

Conclusion- Disagree with the statement

Ans.4 Relevant range is one of the most vital part of management accounting, it deals with cost behaviour how cost moves,

It is important because if anyone make assumption that all the cost remain constant , both fixed and variable , it may cause error in projection

Relevant range gives a level of volume within which the company can operate.