1.2 absorption costing

Question 1

Product cost

Answer 1

Manufacturing costs, costs attached to products

Question 2

Period cost

Answer 2

Non manufacturing costs, not attached to produce

E.g marketing, advertising

Question 3

Pros and cons of Absorption costing

Answer 3

Business needs to be aware of full cost of product to make decisions about viability of product
Can be used in a “cost-plus” pricing approach to pricing decisions

Cons
Allocation of OH may not be precise
Could lose sales by always adopting full cost price

Question 4

Pros and cons of marginal costing

Answer 4

More straight forward to manage than AC
Recognise fixed OH as period cost rather than carrying them forward in stock

Cons
Can understate importance of FC
LT requirement to recognise all costs associated with a product ( VC + FC)

Question 5

Evaluate the difference between absorption costing and marginal costing

Answer 5

They differ in their treatment of fixed production OH
Marginal useful for internal ST pricing & decision making
Absorption better for LT planning and control

Question 6

What costs are relevant for ST pricing

Answer 6

Future costs
Incremental
Cash flow

Question 7

Cost plus pricing

Answer 7

Adds direct direct costs to OH and adds a mark up to get selling price

Question 8

Target pricing

Answer 8

1) find target price customers will pay
2) deduct target profit margin from target price to find target cost
3) estimate acc cost of product
4) If actual cost > target cost investigate ways of closing gap

Question 9

Price skimming
Penetration pricing
Premium pricing

Answer 9

1) high price, low vol, skim profit from market in early stages
2) low price, high vol, typical for mass market products - chocolate bars household goods
3) make product different, add features e.g premium seats