PCTN - Task 1 Questions

Fixed cost per unit rises as the level of output rises

• True

• False

Answer explanation

Total fixed costs remains the same as the level of output increase or decreases. However, the fixed cost per unit decreases as the level of output increases.

For example, total fixed costs for 1,000 units and 2,000 units will the same amount, £40,000. When we calculate fixed cost per unit at 1,000 unit level, we have £40 per unit. When we calculate fixed cost per unit at 2,000 unit level, we have £20 per unit. So we have seen that the unit cost has decreased from £40 to £20.

Total variable cost per unit falls as the level of output rises

• True

• False

Answer explanation

Total variable cost increases in proportion to the increase in the level of output. However, the variable cost per unit remains the same at all levels of output.

For example, total variable costs for 1,000 units is £15,000 and £30,000 for 2,000 units. Variable cost per unit for both levels of output is £15 (£15000/1,000u and £30,000/2,000u)

Information from this system is used for planning, control and decision making

• Financial Accounting

• Management Accounting

This system can incorporate both financial and non-financial data

• Financial Accounting

• Management Accounting

At 4,000 units, the cost per unit is £6.25; at 5,000 units, the cost per unit is £5.00. What is the behaviour of this cost?

• Fixed cost

• Variable cost

• Semi-variable cost

Answer explanation

Total fixed cost is the same for all levels of output. At 4,000, cost per unit is £6.25; total cost is £25,000

At 5,000 units, cost per unit is £5; total cost is £25,000

Therefore this is a fixed cost

At 12,000 units, the cost was £90,000; at 14,000 units, the cost was £105,000. What is the behaviour of this cost?

• Fixed cost

• Variable cost

• Semi-variable cost

Answer explanation

Total cost is not the same for the two levels of output; therefore this is not a fixed cost.

We can test to see if it is a variable cost by calculating the cost per unit at each level of output. If this unit cost is the same, then it is a variable cost.

At 12,000 units, total cost is £90,000 - unit cost is £7.50

At 14,000 units, total cost is £105,000 - unit cost is £7.50.

Therefore this is a variable cost

At 5,000 units, the cost is £26,000; at 8,000 units, the cost is £35,000. What is the behaviour of this cost?

• Fixed cost

• Variable cost

• Semi-variable cost

At 3,000 units, the cost is £8.00 per unit; at 4,700 unit, the cost is £8.00 per unit. What is the behaviour of this cost?

• Fixed cost

• Variable cost

• Semi-variable cost

Financial accounts can provide information about future costs.

• True

• False

Costing can be used by both a manufacturing organisation and a service business.

• True

• False