Question Tag: Non-controllable Costs

a) i) Direct and Indirect Costs:

• Direct costs can be directly identified with a specific cost unit or cost center. Examples include direct materials, direct labour, and direct expenses. The total of direct costs is known as the prime cost.
• Indirect costs cannot be directly identified with a specific cost unit or cost center. Examples include indirect materials, indirect labour, and indirect expenses. The total of indirect costs is known as overheads.

ii) Fixed and Variable Costs:

• Fixed costs are incurred for an accounting period and remain constant in total within certain activity levels.
• Variable costs vary in total in direct proportion with the level of activity.

iii) Controllable and Non-controllable Costs:

• Controllable costs can be influenced by a given level of managerial authority and are within the domain of that managerial authority and responsibility.
• Non-controllable costs cannot be influenced by a given level of managerial authority and are usually determined by higher levels of managerial authority and shared among lower levels.

iv) Production and Non-production Costs:

• Production costs relate to the manufacture of a product or the provision of a service and are included in the cost of sales. Examples include direct materials, direct labour, direct expenses, and production overheads.
• Non-production costs are not directly associated with the production of the business’s output and are charged to the statement of profit or loss as expenses for the period they are incurred. Examples include administrative, selling, and finance costs.

v) Relevant and Irrelevant Costs:

• Relevant costs make a difference in decision making, are generally incremental, futuristic in nature, and involve cash outlays.
• Irrelevant costs do not vary with a given decision under consideration and do not impact the decision. They are usually sunk or past costs that have already been incurred or fixed costs that must be incurred regardless of the decision.

b) Advantages of marginal costing over absorption costing:

1. It discourages stock build-up.
2. There is no under or over absorption of overheads, and hence no adjustment is required in the statement of profit or loss.
3. Fixed costs are treated as period costs and charged in full to the period under consideration.
4. Marginal costing is useful in short-term decision-making processes.
5. It is simple to operate.
6. Separating costs into fixed and variable facilitates cost control. (Any 5 points @ 1 mark each = 5 marks)