1 - Cost and Cost Behaviour Flashcards
what is full cost?
- absorption cost
- unit cost including FMOH
what is direct cost?
- variable cost
- unit cost excluding FMOH
what are discretionary costs?
no relationship with production
what are engineered costs?
have a relationship with production
what are committed costs?
costs incurred upfront at the beginning of the project
what is normal capacity?
normal production to meet demand
what is practical capacity?
theoretical less unavoidable interruptions
what are the advantages of variable costing?
- provides the data required for CVP analysis (CM)
- emphasizes the impact of fixed costs on profit
- profit is not affected by changes in stock, and this helps with preventing mgmt manipulation
what are the advantages of absorption costing?
- is in line with IFRS
- FMOH are essential for production so they should be assigned to products
what are the reasons for using a PDOHR?
indirect costs of manufacturing cannot be identified with specific jobs and thus must be allocated using estimates
why do we use PDOHR and not the actual FC amounts?
because they will not be available on a timely basis and will impact our ability to set the selling prices of our products
why do we calculate PDOHR at the start of the year?
to overcome the cost volatility caused by changes in:
- factory OH costs which change due to seasonal variations = numerator
- activity levels and volume = denominator
