1. Marginal and Absorption Costing

Question 1

What is cost accounting?

Answer 1

The gathering of cost information and its attachment to cost objects, the establishment of budgets, standard costs and actual costs of operations, and the analysis of variances.

Question 2

What two things does the valuation of inventory affect?

Answer 2

Profit (in the P&L) and value of assets (in the SFP)

Question 3

What are the 6 elements of the CGMA cost transformation model?

Answer 3

1. Cost conscious culture
2. Understanding cost drivers
3. Managing associated risks
4. Understanding true profitability
5. Maximising new products’ value
6. Considering environmental footprint

Question 4

What does the CGMA transformation model help businesses do?

Answer 4

Obtain and maintain cost competitiveness

Question 5

What is a cost object?

Answer 5

Any activity for which management may require a separate measurement of cost (a broad term, e.g. product, service or department)

Question 6

What is a cost unit?

Answer 6

Units of production or service for which a cost can be measured

Question 7

What is a cost centre?

Answer 7

Collecting points for costs e.g. a department, a photocopier or a project

Question 8

What is the formula for contribution?

Answer 8

Selling price - variable cost

Question 9

What is the value of contribution useful for?

Answer 9

When making decisions about increasing or decreasing production and sales

Question 10

What are the steps for assigning cost per unit in absorption costing?

Answer 10

1. Allocate direct costs to cost units
2. Allocate indirect costs to individual production and service cost centres
3. Apportion common costs between cost centres
4. Re-apportion service department costs to production departments
5. Absorb the overheads to cost units using the Overhead Absorption Rates

Question 11

What is the equation for OAR?

Answer 11

Budgeted overhead/budgeted level of activity

Question 12

What method of costing leads to higher inventory values?

Answer 12

Absorption costing

Question 13

What is the equation for reconciling profit under absorption and marginal costing?

Answer 13

Absorption profit + (Change in Inventory)*(OAR)

Question 14

What are the 3 advantages of marginal costing over absorption costing?

Answer 14

1. Better for decision-making
2. Fixed costs are treated as period costs
3. Profit depends only on sales, not production, and hence enables clearer performance evaluation

Question 15

What are the 3 disadvantages of marginal costing over absorption costing?

Answer 15

1. Does not comply with IFRSs
2. All costs must be split into fixed and variable parts
3. Cannot ignored fixed costs