Association of Accounting Technicians (AAT) Principles of Costing (Level 2) Syllabus

Principles of Costing (Level 2) syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Principles of Costing (Level 2) in Association of Accounting Technicians (AAT), not a summary of it.

1. 1

   Introduction to Cost Accounting

   4 topics

   • Purpose of management and cost accounting
     • Comparing financial and management accounting
   • Cost centres, profit centres and investment centres
   • Classifying costs by element
     • Materials, labour and overheads
   • Classifying costs by nature
     • Direct and indirect costs
     • Fixed, variable, semi-variable and stepped costs
2. 2

   Cost Behaviour and Coding

   4 topics

   • Coding systems for costs and income
   • Cost behaviour and the high-low method
     • Splitting semi-variable costs
   • Unit cost and total cost calculations
   • Cost per unit at different activity levels
3. 3

   Inventory Valuation and Labour Costs

   3 topics

   • Methods of inventory valuation
     • FIFO (first in, first out)
     • LIFO (last in, first out)
     • AVCO (weighted average cost)
   • Effect of valuation methods on profit
   • Labour payment methods
     • Time-rate and overtime
     • Piecework and bonus schemes
4. 4

   Spreadsheets and Comparing Costs

   3 topics

   • Using spreadsheets for cost data
   • Comparing budgeted and actual costs
     • Calculating variances
     • Adverse and favourable variances
   • Reporting cost information to management

Principles of Costing (Level 2) flashcards for Association of Accounting Technicians (AAT)

18 of 50 cards from the Principles of Costing (Level 2) deck — real questions with worked answers.

1. What is the main purpose of management accounting?

   To provide financial and non-financial information to internal managers to help them plan, control, make decisions and improve performance. It is forward-looking and produced as often as needed, with no statutory format.

2. How does management (cost) accounting differ from financial accounting in terms of audience, time focus and regulation?

   Management accounting serves internal users, focuses on the future (forecasts/budgets), and follows no legal format. Financial accounting serves external users, reports past results, and must follow legal/accounting standards.

3. What is cost accounting?

   The process of recording, classifying and analysing costs of products, services or activities so that managers can ascertain costs, value inventory, plan, control and make decisions.

4. Define a cost centre.

   A part of a business (location, function, department or machine) to which costs can be charged and collected, but which does not directly earn revenue. Example: a maintenance department.

5. Define a profit centre.

   A part of a business that incurs costs and also earns revenue, so that a profit (revenue minus costs) can be calculated for it. Example: a retail store branch.

6. Define an investment centre.

   A part of a business whose manager is responsible for costs, revenues and the capital/assets invested, allowing a return on investment to be measured. It is the widest level of responsibility.

7. List the three responsibility centres in order of increasing managerial responsibility.

   1) Cost centre (costs only), 2) Profit centre (costs and revenue), 3) Investment centre (costs, revenue and investment/capital).

8. What are the three main cost elements used to classify costs?

   Materials, Labour, and Expenses (overheads). Every cost can be analysed into one of these three elements.

9. Classifying by nature: what is the difference between direct and indirect costs?

   Direct costs can be traced specifically to a single cost unit (e.g. raw materials, production wages). Indirect costs (overheads) cannot be traced to one unit and are shared across many units (e.g. factory rent).

10. What is prime cost?

    The total of all direct costs: $$\text{Prime cost} = \text{Direct materials} + \text{Direct labour} + \text{Direct expenses}$$

11. How is total production (factory) cost calculated?

    $$\text{Total production cost} = \text{Prime cost} + \text{Production overheads}$$ i.e. direct materials + direct labour + direct expenses + indirect production costs.

12. Distinguish between fixed costs and variable costs.

    Fixed costs stay the same in total regardless of activity level (e.g. rent). Variable costs change in total in direct proportion to activity level (e.g. raw materials), but stay constant per unit.

13. What is a semi-variable (mixed) cost? Give an example.

    A cost containing both a fixed and a variable element, e.g. a telephone bill with a fixed line rental plus a variable charge per call, or electricity with a standing charge plus usage.

14. What is a stepped (step-fixed) cost?

    A cost that is fixed over a range of activity but jumps to a new fixed level once a threshold is crossed, e.g. needing an extra supervisor or extra warehouse once output exceeds a certain level.

15. How does fixed cost per unit behave as activity increases?

    Total fixed cost stays constant, so the fixed cost per unit falls (decreases) as the number of units increases, because the fixed cost is spread over more units.

16. How does variable cost per unit behave as activity increases?

    Variable cost per unit stays constant; total variable cost rises in proportion to activity.

17. What is the purpose of a coding system for costs and income?

    To assign a unique reference (code) to each item so transactions can be classified, recorded, sorted, analysed and reported accurately and efficiently, reducing errors and easing computer processing.

18. Name the main types of coding systems used in costing.

    Sequential (numbers in order), Block (ranges allocated to categories), Hierarchical (digits with structured meaning), Faceted/significant (each part describes a feature), and Mnemonic/alphabetic (letters that suggest meaning).

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