3: Calculating Cost Units

Question 1

What is a standard cost, and a standard cost card?

Answer 1

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

Question 2

What are the five kinds of cost that you’ll find on a cost card?

Answer 2

Direct costs (prime)

Variable production overheads

Fixed production overheads

Variable non-production overheads

Fixed non-production overheads

Question 3

What are the two methods of valuing closing inventory from a cost card, and a basic description?

Answer 3

Absorption costing
- inventory is valued as full production cost

Marginal costing
- inventory valued at variable production cost only

Question 4

What is absorption costing also known as?

Answer 4

Full costing

Question 5

What are the three steps to assigning fixed overheads to a cost?

Answer 5

1. Allocation and apportionment
2. Reapportionment
3. Absorption

Question 6

What is Allocation?

Answer 6

The process of charging whole items directly to a cost centre

Appropriate for overheads which arise solely in one cost centre

Question 7

What is ‘Apportionment’?

Answer 7

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

Question 8

How to go about apportionment?

Answer 8

1. Determine what costs need to be apportioned
2. 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

Question 9

What is reapportionment?

Answer 9

Taking the total cost for each service centre, and redistributing to the production centres

Question 10

What is the process for reapportionment?

Answer 10

1. Determine the service centres
2. 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
3. Split the costs out one by one, then add up the new totals for the production centres
   - costs need to be cumulative!

Question 11

What is an OAR and what is the formula?

Answer 11

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.

Question 12

How to choose a level of activity, and what are the options?

Answer 12

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

Question 13

OAR: number of cost units?

Answer 13

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!

Question 14

OAR: prime cost?

Answer 14

1. Total cost
   ————-
   Total prime cost
2. Take rate, and MULTIPLY BACK to the total prime cost for each unit, to get the allocation for each unit

Question 15

OAR: direct labour cost?

Answer 15

1. Total cost
   ————-
   Total cost of direct labour
2. Take rate, and MULTIPLY BACK to the total direct labour hours for each unit, to get the allocation for each unit

Question 16

OAR: hourly rate?

Answer 16

1. Total cost
   ————-
   Total hours
2. 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

Question 17

How to deal with multiple department OAR’s?

Answer 17

Make separate OARs for each department!

Question 18

OARs: blanket absorption rate?

Answer 18

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

Question 19

Why do we calculate the over/under absorption, and what is the calculation?

Answer 19

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)

Question 20

Steps to determining over and under absorption?

Answer 20

1. Calculate the OAR.
2. Calculate the absorbed overhead. OAR x Level of actual activity
3. Put into the calculation

Actual overhead
Absorbed overhead
—————————
Under (over)

Question 21

What determine’s an organisations costing method?

Answer 21

The specific nature of the operations

Cost units of different types lends to different costing methods

Question 22

What are the two types of costing method, and the subcategories?

Answer 22

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

Question 23

Job costing?

Answer 23

Specific one of jobs os relatively short duration

Prime costs and absorbed overheads

Ie. a plumbing job, garden design

Question 24

Contract costing?

Answer 24

Specific one-off jobs of relatively long period of time

Includes prime cost, allocated overheads, absorbed overheads

Ie. Bridge, building a hospital

Question 25

Batch costing?

Answer 25

For a group of identical cost units

Includes prime costs and absorbed overheads

Unit cost =

Total batch cost
———————
Number of units in batch

Question 26

Process costing?

Answer 26

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

Question 27

Alternative method of calculating under/over absorption?

Answer 27

(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