1.6 Costing Techniques Flashcards
Absorption Costing
Treats all manufacturing costs (Both fixed and variable) as product costs. Used for financial reporting also called full costing
Gross margin (profit)
The net between sales revenue and absorption COGS
Variable costing
Considers only variable manufacturing costs as product costs
Contribution margin
Net sales minus all variable costs (both variable product and period costs)
Actual costing
After the end of a period, all actual costs for a cost object are totaled and indirect costs are allocated.
Very accurate, but not timely
Normal costing
Charges actual direct cost and direct labor, but applies overhead on the basis of a budgeted rate
Extended normal costing
Uses normalized rates for direct material, direct labor, and manufacturing overhead
Job-order costing
Costs are assigned to specific jobs. Used for producing heterogeneous products
Process costing
Used when similar products are mass produced. Costs are attached as the items pass specific departments or phases of production
Activity-based costing
Attaches cost to activities rather than physical goods
Peanut butter costing
Inaccurating spreading of costs over products or services units that use different resources
Life-cycle costing
Emphasizes the need to prices products to cover all the costs incurred over the life span of a product
Standard costing
System designed to alert management when actual costs differ from target (standards) costs
How are standard costs determined
An objective estimate of what a cost should be
What costing systems can standard costing be used with
Job order and process costing
Flexible budgeting
The calculation of the quantity and cost of inputs that should have been consumed at a given level of production
Static budget
Company’s best projection of the resource consumption and the levels of output that will be achieved for an upcoming period.
Management by exception
Practice of giving attention primarily to major deviations from expectations
Physical unit method (allocation joint costs)
Total joint costs are allocated in proportion to some physical measure
(Units of each product/ Total units)
Sales-value at split off method (allocation joint costs)
Estimated selling price at split-off point / Total selling price at split-off point
Estimated net realizable value method (allocation joint costs)
(Estimated final price-Separable costs) / Total estimated final price
Constant gross margin percentage NRV method (allocation joint costs)
- Determine overall gross-margin percentage
- Subtract the appropriate gross margin from the final sales value of each product to calculate total costs for that product
- Subtract the separable costs to arrive at the joint cost amount
Direct method (allocating service department costs)
directly allocates service department costs to (and only to) production departments
Step-down method (allocating service department costs)
- Service departments are allocated in order from the ones that provide the most service to the least
- As each allocation is performed the costs of the service department are allocated to the remaining service departments and production departments
Reciprocal method (allocating service department costs)
Uses simultaneous equations to allocate service department costs among other service departments and production departments
Target costing
The practice of calculating the price of a product by adding the desired profit margin to the total unit cost
