AAT L2 Elements of Costing 2 — Questions and Answers
Question 1: The prime cost of a product is calculated as:
- Direct materials + Direct labour + Production overheads
- Direct materials + Direct labour + Direct expenses (Correct answer)
- Total production cost minus profit
- Selling price minus total cost
Correct answer: Direct materials + Direct labour + Direct expenses
Prime cost includes only direct costs: direct materials, direct labour, and any direct expenses. It excludes all indirect costs (overheads). Prime cost represents the costs directly traceable to the units produced.
Question 2: A manufacturing business produces 10,000 units. Fixed costs are £50,000 and variable costs are £3 per unit. What is the total cost?
- £80,000 (Correct answer)
- £30,000
- £50,000
- £53,000
Correct answer: £80,000
Total cost = Fixed costs + Total variable costs = £50,000 + (10,000 × £3) = £50,000 + £30,000 = £80,000.
Question 3: Cost centres are best described as:
- Sections of the business to which costs can be charged for control purposes (Correct answer)
- The different types of costs a business incurs
- The customers who buy products from the business
- The bank accounts used by the business
Correct answer: Sections of the business to which costs can be charged for control purposes
A cost centre is a department, function, or area of the business to which costs are allocated for the purpose of cost control and performance measurement. Examples include the assembly department, the packaging department, or the canteen.
Question 4: Overheads are also known as:
- Direct costs
- Prime costs
- Indirect costs (Correct answer)
- Variable costs
Correct answer: Indirect costs
Overheads are indirect costs that cannot be directly attributed to specific units of production. They include production overheads (factory costs), administrative overheads, and selling and distribution overheads.
Question 5: If a product has a total cost of £25 and is sold with a 40% mark-up on cost, what is the selling price?
- £35.00 (Correct answer)
- £65.00
- £15.00
- £10.00
Correct answer: £35.00
A 40% mark-up on cost means the profit is 40% of the total cost. Profit = £25 × 40% = £10. Selling price = Cost + Profit = £25 + £10 = £35.
Question 6: Which of the following is classified as an administrative overhead?
- Depreciation of factory machinery
- Raw material wastage
- Salary of the finance team (Correct answer)
- Delivery driver wages
Correct answer: Salary of the finance team
The finance team's salary is an administrative overhead — it supports the general running of the business rather than production or selling activities. Factory depreciation is a production overhead, and delivery wages are a distribution cost.
AAT L2 Elements of Costing 2
The prime cost of a product is calculated as: