5- Relevant cost and decision making Flashcards
What are 3 main ways management accounting distinguishes itself from financial accounting?
- It’s not a legal requirement
- It’s only used internally
- Uses present data as well as past to make future decisions
What are the 2 main cost components?
- Production/prime costs
- Non-production costs/overheads
What are the 3 main components of production costs?
- Materials
- Labour
- Direct overheads
What are the 4 main components of non-production costs?
- Administration
- Selling
- Distribution
- Finance
What are the 2 categories production costs can be split into?
- Direct costs
- Indirect costs
What is a direct cost?
A cost that can be traced in full to the product, service or department that is being costed.
Total direct costs=prime costs
What are indirect costs?
Costs incurred in the course of making a product/service but cannot be aligned with a particular cost unit
Total indirect costs=production overheads
What is breakeven point?
Sales volume giving a profit of 0
What are the 3 main assumptions of cost-volume-profit (C-V-P) analysis?
-Selling price per unit
-Variable cost per unit
-Fixed costs
Are all constant
What is contribution per unit?
Price per unit - Variable cost per unit
What is the formula for breakeven point (BEP)?
BEP = Fixed costs/contribution per unit
What is absorption costing (AC)?
Method whereby all production costs are included in the cost of a cost-unit
What are 3 main advantages of absorption costing?
- Consistent with SSAP9 & IAS2
- Doesn’t require the separation of mixed costs into fixed and variable components
- Ensure fixed costs are covered when setting prices
What are 3 main disadvantages of absorption costing?
- Profit can be manipulated by changing inventory levels
- No relationship between profit and sales volumes
- Based on the assumption that overheads are volume related
What is marginal costing (MC)?
MC includes only the variable cost of a product or service; cost which could be avoided if the unit were not produced
