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Is there an easy way to readily differentiate between selling,distribution and administrative costs.
If you understand what is meant by selling, distribution and administrative costs, then it is just applying that to whatever is in the question.
Questions are testing that you understand what is meant by each heading.However, this is very unlikely to be of any relevance in Paper MA – it is in Paper FA that is matters (because of producing the Statement of Profit or Loss).
In Paper MA it is the difference between production and non-production costs that matters. Selling, distribution, and admin costs are all non-production and what we call them doesn’t matter.In cost classification & Behaviour chapter’s quiz, Question number 2, it is solved as :
“Therefore the total cost will be = $170000- (2000*$5)
= $170000- (10,000)
= $160,000.”As in my understanding, Total cost = Fixed cost + Variable cost
Whereas, in above solved problem, I can see Total cost = Fixed cost – Variable cost.
Can you please explain me this solution?
Thank You.
In future you must start a new thread when you are asking about something else – this has nothing to do with selling and admin costs 🙂
You have not read the line previous to the line you quoted!!!
We know that the cost of 22,000 units is $170,000 because that is given in the question.
We are asked what the cost will be of 20,000 units. The only difference between the cost of 22,000 and the cost of 20,000 is that the total variable cost will be lower for 20,000 units. The fixed cost will be the same.
Since the variable cost is $5 per unit, then making 2,000 fewer units will mean that the cost will be lower by 2,000 x $5.I assume that you watched my free lectures before attempting the test, in which case by all means calculate the fixed cost as well and you will come to exactly the same answer (but it takes longer and in the exam speed is vital).
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