ITPEC IP April 2018 Question 71
Company A manufactures and sells product B. Which of the following is the appropriate expression for calculating the total cost of product B? Here, the total cost refers to all the costs incurred until product B is sold.
Explanation
Manufacturing cost + selling expenses — the total cost of a product is everything spent to make it plus everything spent to sell it.
Manufacturing cost covers materials, labour and overheads used to produce product B. Selling it adds further costs: advertising, sales staff, shipping. Total cost is the sum of the two, and sales minus total cost gives the operating profit, so sales = manufacturing cost + selling expenses + operating profit.
Answer (a)
Why not others:
- •(b) — operating profit is what remains after all costs, not a cost; manufacturing cost + operating profit equals sales − selling expenses, the same quantity as (d)
- •(c) — sales − manufacturing cost is the gross profit, a profit figure rather than a cost
- •(d) — sales − selling expenses equals manufacturing cost + operating profit: it includes the profit and drops the selling expenses, so it is not the total cost
Key rule: Costs add up (manufacturing cost + selling expenses = total cost); profits are sales minus costs, so an expression that starts from sales gives a profit, not a cost.
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