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ACCA Applied Knowledge · Management Accounting · Cost classification

A manufacturing company uses a coding system in which each cost is given a code such as 3-210-45, where the first digit shows the cost type, the next three digits the cost centre and the last two digits the product line. What is the main advantage of using such a hierarchical code?

The main advantage is that a hierarchical code lets costs be classified, posted and summarised accurately and quickly by cost type, cost centre or product. It speeds up analysis and reduces ambiguity, but it cannot guarantee freedom from errors or change cost behaviour.

  1. AIt allows costs to be classified and posted accurately and to be summarised quickly by type, centre or productCorrect
  2. BIt removes the need to record the descriptions of costs in the ledger
  3. CIt ensures that all costs are treated as variable costs in the reports
  4. DIt guarantees that no cost will ever be miscoded

Explanation

A structured code gives each cost a unique identity and lets data be sorted and summarised by the elements within it. Coding does not remove the need for descriptions or make errors impossible, and it has no effect on whether costs behave as fixed or variable.

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