5. Methods Of costing

Question 1

What are the unit costs that can be calculated

Answer 1

Prime cost
Direct materials and direct labour

Marginal cost
Prime cost + variable production overheads

Absorption cost
Marginal cost + fixed production overheads.

Total cost
Absorption cost + fixed non-production overheads

Question 2

Job costing is used where…

Answer 2

Each job can be separately identified from other jobs and costs are charged to the job.

The Job is the ‘Cost unit’

Question 3

Batch costing is used where…

Answer 3

Is used where the output consists of a number of identical items which are produced together as a batch.

The Batch is the ‘cost unit’

Question 4

What costing methods for specific orders are there?

Answer 4

Job costing

Batch costing

Question 5

What costing methods are there for Continuous work?

Answer 5

Service costing eg. Bus service

Process costing eg. Chocolate bars

Question 6

Process costing … outcomes

Answer 6

No loss

Normal loss (with/without scrap sales)

Abnormal loss (with/without scrap sales)

Abnormal gains (with/without scrap sales)

Question 7

Handling of normal / abnormal losses

Answer 7

.

Question 8

Abnormal losses / gains are valued … ?

Answer 8

… same cost per unit as ‘expected output’ (which may include normal loss)

Question 9

Process T account

Answer 9

The finished good unit cost should be:

Input cost / expected output.

(Minus any Normal loss to get the expected output figure to use)

Then use that unit cost against any Abnormal Loss/ Gain.

Question 10

Process account Finished goods amount…

Answer 10

Put in the Actual output amount …

… then put in any abnormal gain (dr side) or loss (Cr side)

Question 11

If there is normal loss (with a scrap value) and there is an abnormal gain…

Answer 11

Offset the abnormal gain against the normal loss …. but at the scrap unit cost!!!

Really working with the qty at this stage … next deal with the ££s …

…Then the balancing amount (£) goes to SPL (debit Abnorm gain, credit PL)

Work with the qty not the cost here…

Question 12

Normal losses are valued ?

Answer 12

At scrap value (if any)

Question 13

Differences Marginal and Absorption costing?

Answer 13

Treat product and period costs differently.

Marginal -
Classes costs by behaviour… variable product or fixed period.
This classification is used to cost products on basis of variable costs.
Helps short-term decision-making.
“Can we afford to sell 1000 units each month to H at 30% disc?”

Absorption -
Absorbs period costs by means of OAR.
Used to calculate inventory valuations and profit or loss in financial statements.
“What profit have we made this year?”

Question 14

What is marginal cost?

Answer 14

Cost of producing 1 extra unit of output.

Question 15

Marginal cost per unit comprises?

Answer 15

Variable costs:

Variable direct materials.
Variable direct labour.
Variable direct expenses.
Variable overheads (ie split production OHs & include variable not fixed)

Question 16

Absorption cost includes ?

Answer 16

Direct materials.
Direct Labour.
Direct expenses.
Production overheads (Fixed and variable)

Do not include Non-production overheads.

Question 17

What not to include in absorption cost?

Answer 17

Non-production OHs

Question 18

Define activity based costing

Answer 18

ABC is a technique which charges overheads to production on the basis of activities.

ABC makes use of COST DRIVERS which are activities which cause costs to be incurred.

Eg. Set up cost (there should be a higher cost for small batches)
Eg. Quality inspection.