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ACCA Applied Knowledge · Management Accounting · Cost classification

Dunmore Ltd's factory building is used 70% for production, 20% for the sales department and 10% for the administration offices. Total annual building costs are $90,000. Which statement about the functional classification of these costs is correct?

The building costs are split by usage: $63,000 to production (70%), $18,000 to selling and distribution (20%) and $9,000 to administration (10%). Functional classification allocates shared costs to the function that uses them rather than assigning all to production.

  1. A$63,000 is a production cost, $18,000 selling and distribution, $9,000 administrationCorrect
  2. B$90,000 is a production cost as the building is a factory
  3. C$72,000 is a production cost, $9,000 selling and $9,000 administration
  4. D$63,000 is a production cost, $9,000 selling and $18,000 administration

Explanation

The costs are apportioned by use: 70% x $90,000 = $63,000 production, 20% = $18,000 selling and distribution, 10% = $9,000 administration. The option with selling and administration reversed applies the percentages to the wrong functions.

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