AAT Level 2 Principles of Costing common mistakes
AAT Level 2 Principles of Costing · Understand the traps and how to avoid them.
Coding an overhead to a category by the nature of the payment rather than by the purpose it serves - for example putting factory building insurance, factory canteen costs or the works manager's salary into administration overheads because 'insurance', 'catering' and 'salaries' appear on an admin list in the study text.
Candidates memorise overhead categories as lists of typical items and pattern-match on the supplier or the payment description instead of reading what the cost is actually for.
What to do instead
Apply a two-step test on every cost: (1) is it direct or indirect? (2) which function does it support - production, selling and distribution, or administration? Classify by the department that uses the resource, not by what was bought.
Treating any cost incurred inside the factory, such as a production supervisor's salary or machine depreciation, as a direct cost simply because it belongs to a production cost centre.
Candidates confuse traceability to a cost centre with traceability to a cost unit, so 'it's in the production department' becomes 'it's direct'.
What to do instead
Use the cost-unit test: a direct cost must be traceable to a specific unit, job or batch in an economically sensible way. Supervisor salary and depreciation cannot be traced per unit, so they are indirect (production overhead) even though they sit in a production cost centre.
Recording the purchase of a delivery van, a machine or a shop-fitting as an expense of the period in the cost records because the word 'cost' appears on the invoice.
Candidates do not distinguish capital from revenue expenditure and simply treat every payment as a cost of the period in which it is paid.
What to do instead
Ask whether the benefit lasts beyond one accounting period and whether the item is an asset with a useful life - if yes, it is capital expenditure and only the depreciation charge enters the cost records for the period.
Apportioning a genuinely shared cost such as rent, heat and light directly to a single cost centre, or conversely spreading a cost that clearly belongs to one cost centre (e.g. a dedicated machine's lease) across all centres.
Candidates do not separate allocation (wholly attributable, no basis needed) from apportionment (shared, needs a fair basis), and grab a basis without checking whether one is required.
What to do instead
Sort every overhead first: if the whole amount belongs to one cost centre, allocate it outright; only if it is shared, apportion it on a stated basis (floor area for rent and heat, machine hours for depreciation, number of employees for canteen) and show the basis.
Calculating the overhead absorption rate by dividing actual overhead by actual activity, or reversing the over/under absorption calculation so that overspending is reported as under-absorption.
Candidates conflate the predetermined rate with the absorbed amount and rely on a memorised 'one minus the other' without reasoning about which figure is bigger.
What to do instead
Fix the order in a formula line: predetermined rate = budgeted overhead / budgeted activity; absorbed = rate x actual activity; over/(under) absorption = absorbed - actual overhead. Write both figures side by side and state which is larger before assigning the label.
Working through a stores ledger and issuing materials at the price of the most recent receipt (or a stale average), failing to recalculate the average cost after each receipt, or switching between FIFO and AVCO partway through the question.
Candidates build the ledger row by row under time pressure and treat each issue as an independent calculation instead of carrying the running balance forward.
What to do instead
Draw the four-column proforma (receipts, issues, balance quantity, balance value). Under AVCO, recalculate balance value / balance quantity immediately after every single receipt before pricing any issue; under FIFO, track the remaining layers and tick them off as they are used. Do not price an issue until the receipt line above it is complete.
Charging overtime premium and idle time to direct labour and so to the cost unit, rather than to production overhead.
Candidates see the whole wage cost on the payslip as the cost of making the product and do not separate basic pay from the premium, or paid hours from hours actually worked.
What to do instead
Split the labour cost: basic pay for hours actually worked on the unit is direct; the overtime premium is direct only where the overtime was worked at the specific customer's request, otherwise it is overhead. Idle time is always paid but never productive, so it goes to overhead.
Building up the direct labour cost from net pay, or from gross pay with no employer's National Insurance and pension contributions added.
Candidates pick the most prominent figure on a payslip or in the question and forget that the employer's on-costs are part of the cost of employing the labour.
What to do instead
Build the cost from the employer's side: gross pay, plus employer's NIC, plus employer's pension contributions, plus any other employer on-costs. Employee PAYE and employee NIC are deductions from net pay and never form part of the employer's labour cost.
Producing a job or product cost statement that mixes total figures with per-unit figures in the same column, omits a heading row, or leaves the reader unable to see how the total cost per unit was reached.
Candidates treat the answer as a working rather than a communication, and add per-unit figures to totals when rolling up a batch.
What to do instead
Lay out a statement with separate columns headed 'Total £' and 'Per unit £', add down each column separately, and state the number of units the total relates to. Before writing the final figure, confirm every cost element appears once and that the per-unit column equals the total column divided by the unit count.
Confusing mark-up and margin when quoting or presenting a selling price from a given cost, using the cost as the base for a margin percentage or the selling price as the base for a mark-up percentage.
Both terms are percentages of profit and candidates grab the first percentage that appears without identifying whether the base is cost or selling price.
What to do instead
Write the base down first: mark-up % is applied to cost, margin % is applied to selling price. For a margin, price = cost / (1 - margin %); for a mark-up, price = cost x (1 + mark-up %). Test the answer by recomputing the profit percentage on the base you were given.