3: Calculating Cost Units Flashcards
What is a standard cost, and a standard cost card?
Standard cost - the expected, or budgeted, cost per unit of output
Cost card - the expected usage of resources and price of resources for each cost unit. Drawn up in advance of a period
What are the five kinds of cost that you’ll find on a cost card?
Direct costs (prime)
Variable production overheads
Fixed production overheads
Variable non-production overheads
Fixed non-production overheads
What are the two methods of valuing closing inventory from a cost card, and a basic description?
Absorption costing
- inventory is valued as full production cost
Marginal costing
- inventory valued at variable production cost only
What is absorption costing also known as?
Full costing
What are the three steps to assigning fixed overheads to a cost?
- Allocation and apportionment
- Reapportionment
- Absorption
What is Allocation?
The process of charging whole items directly to a cost centre
Appropriate for overheads which arise solely in one cost centre
What is ‘Apportionment’?
The process of sharing cost items between cost centres
For overheads that are factory wide
Should be apportioned so that each charge will reflect the benefit obtained by that centre from the cost incurred
How to go about apportionment?
- Determine what costs need to be apportioned
- Figure out the percentage of the total is apportioned to each cost centre, use that same percentage on the cost to split the cost out
What is reapportionment?
Taking the total cost for each service centre, and redistributing to the production centres
What is the process for reapportionment?
- Determine the service centres
- Determine the order they need to be reapportioned
- CHOOSE one that gives the biggest proportion to other SCs
- if not that, one with biggest costs - Split the costs out one by one, then add up the new totals for the production centres
- costs need to be cumulative!
What is an OAR and what is the formula?
Overhead Absorption Rate
How much of the cost belongs to each unit
Budgeted overhead cost
———-————————-
Budgeted level of activity
Remember: if you’ve been given the fixed overhead cost per unit, THAT IS the OAR.
How to choose a level of activity, and what are the options?
Should realistically reflect the characteristics of that cost centre, and provide a reasonably accurate estimate
- number of cost units
- labour hours
- machine hours
- direct materials cost
- prime cost
- direct labour cost
OAR: number of cost units?
Budgeted costs / number of cost units
Effective if all the cost units are identical in resources utilised
Do not use if different products that require different resources!
OAR: prime cost?
- Total cost
————-
Total prime cost - Take rate, and MULTIPLY BACK to the total prime cost for each unit, to get the allocation for each unit
OAR: direct labour cost?
- Total cost
————-
Total cost of direct labour - Take rate, and MULTIPLY BACK to the total direct labour hours for each unit, to get the allocation for each unit
OAR: hourly rate?
- Total cost
————-
Total hours - Take rate, and MULTIPLY BACK to the total hours for each unit, to get the allocation for each unit. Could be 0.5!
Can be machine hours or direct labour hours
How to deal with multiple department OAR’s?
Make separate OARs for each department!
OARs: blanket absorption rate?
Do a calculation for all totals across all departments
Only appropriate if individual department OARs would be similar to overall company OARs
Not usable if departments use different amount of times on products
Single factory absorption rate
Why do we calculate the over/under absorption, and what is the calculation?
Because the total overheads are budgeted and will be different to the actual overheads used
Actual overheads incurred
Absorbed overhead (OAR x Actual Activity)
————————————-
Under (over)
Steps to determining over and under absorption?
- Calculate the OAR.
- Calculate the absorbed overhead. OAR x Level of actual activity
- Put into the calculation
Actual overhead
Absorbed overhead
—————————
Under (over)
What determine’s an organisations costing method?
The specific nature of the operations
Cost units of different types lends to different costing methods
What are the two types of costing method, and the subcategories?
Specific order costing
Work done consists of separately identifiable jobs or batches
- job costing, contract costing, batch costing
Continuous operation costing
Similar products of services are produced as a result of a sequence of continuous operations
- process costing
Job costing?
Specific one of jobs os relatively short duration
Prime costs and absorbed overheads
Ie. a plumbing job, garden design
Contract costing?
Specific one-off jobs of relatively long period of time
Includes prime cost, allocated overheads, absorbed overheads
Ie. Bridge, building a hospital
Batch costing?
For a group of identical cost units
Includes prime costs and absorbed overheads
Unit cost =
Total batch cost
———————
Number of units in batch
Process costing?
A continuous flow of operations
Each cost centre is usually one stage in a bigger production process
Includes prime costs and absorbed overheads
Unit cost =
Total process cost
————————-
Number of units produced
Alternative method of calculating under/over absorption?
(Units produced - units budgeted) x OAR
This will get you just how to much under or over absorption there is
Can be used on bigger totals
