Cost Estimation Questions and Answers

Answer: A

Correct answer: factory overhead

\[ \mathrm{Works\ cost} = \mathrm{prime\ cost} + \mathrm{factory\ overhead}. \] The build-up adds one layer of overhead at each stage - factory, then administration, then selling - and the profit last of all. Keeping the order straight is most of what these definitions require.

Answer: B

The office, the accounts department and the directors' salaries are added at this stage, giving the full cost of having produced the goods. Selling and distribution follow, since they are incurred to dispose of the output rather than to make it.

Answer: C

Correct answer: selling and distribution overhead

\[ \mathrm{Total\ cost} = \mathrm{cost\ of\ production} + \mathrm{selling\ and\ distribution}. \] The cost of production already includes factory and administration overhead, so the only layer left to add is the cost of getting the product to the customer.

Answer: D

Correct answer: profit margin

Total cost is the last of the cost figures, and the selling price is what is charged for the item - so what separates them is the profit. Every overhead has already been absorbed by this point, which is why adding one of them again is the error the distractors offer.

Answer: A

Labour hours, machine hours or direct labour cost serve as the base, and the rate then loads overhead onto each job in proportion to that base. Choosing a base that genuinely drives the overhead is what makes the absorption meaningful.

Answer: B

Set-ups, inspections and material movements are identified as cost drivers, and products are charged for the drivers they actually consume. A low-volume product with frequent set-ups is thereby shown to cost far more than a blanket labour-hour rate suggested.

Answer: C

Correct answer: operation, maintenance and disposal over the whole life

First cost is what it takes to acquire; life cycle cost adds everything the asset will consume before it is disposed of, and the cost of disposing of it. For plant with a long life the running costs commonly exceed the purchase price several times over, which is why selection on first cost alone so often costs more.

Answer: D

Correct answer: 15.2 million

The six-tenths rule scales cost with capacity raised to the power 0.6: \[ 10 \times 2^{0.6} = 10 \times 1.516 = 15.2\ \mathrm{million}. \] Doubling the capacity costs about half as much again rather than twice as much, which is the economy of scale the rule expresses.

Answer: A

Correct answer: 75 800

\[ \frac{15{,}157{,}000}{200} = 75{,}800\ \mathrm{per\ tonne\ of\ daily\ capacity}, \] against 100,000 for the smaller plant. The unit cost has fallen by about a quarter, and that fall is the whole practical consequence of the exponent being below one.

Answer: B

Correct answer: 7.5 million

\[ 5 \times \frac{600}{400} = 7.5\ \mathrm{million}. \] A cost index carries a historical cost forward to today’s prices, and the ratio is of the new index to the old. Inverting it gives 3.33, which is offered here - the check is that a rising index must give a rising cost.