2) Traditional costing Flashcards
What costs are involved in absorption costing
Direct costs (material, labour) Indirect costs (production costs) eg. factory rent, super visors salary, electricity, depreciation
Do not include non-production costs eg, advertising, delivery, cleaners
What are the advantages and disadvantages of absorption costing?
ADVANTAGE
Fixed production costs can be a large proportion of the cost card
It is necessary to include fixed production overheads in inventory valuations
Over/under absorption analysis can be used
DISADVANTAGE
Under selling means that not enough production overhads have been absorbed to it will need to be attached to the closing inventory. Over selling means to much has been absorbed
What is marginal costing
Marginal costing is only diect materials, direct labour and variable overheads.
Quote: how much would one extra unit cost if all overheads have been absorbed
What are the advantages and disadvantages of marginal costing
ADVANTAGES
There are no requiremets to absorb overhead costs
When sales increase the cost card will only increase by thevariable cost
Good for short term decisions
DISADVANTAGES
Not good for long term decisions
Salary labour costs can be fixed not variable
Accumulation of overheads can be over seen
What are the four factors to consider in pricing strategies
Costs - Price needs to cover the cost of producing a unit or service
Competitors - ensuring the price is correct against other competitor products
Customers - How much is the customer willing to pay
Corporate objectives - Taking over a market might mean lowering prices or producing quality means increasing prices
Calculate markup on costs vs markup on sales
example: Costs are $38.85 and 15% is needed on both
Markup on costs:
$38.85 x 1.15 = $44.68
Markup on sales:
15 / 85 x $38.85 = $45.71
Calculate on $60 costs a) 20% on markup b) 20% on margin
Markup:
$60 x 1.20 = $72
Margin
$60 / (1 - 0.20) = $75
