6. Full Costing

Question 1

What are “Direct costs”?

Answer 1

Direct costs are those costs that can be specifically and exclusively identified with a particular cost object.

Question 1

What are “Indirect costs”?

Answer 1

Indirect costs cannot be specifically and exclusively identified to a particular cost object.

Question 2

What is “overhead”?

Answer 2

Overhead is expenditures in labour, material or service which cannot be economically identified with a specific saleable unit.

Question 3

What is “Total cost per unit”?

Answer 3

Total Cost per unit is the sum of Direct Costs per unit and Indirect Costs per Unit

Question 4

What is the difference between “indirect costs” and “overhead”?

Answer 4

None. Its the same.

Question 5

What is the problem with full costing?

Answer 5

The problem with full costing is that indirect costs can not be related to one unit, so we have to find a way to allocate them to a unit. We must find a way to “absorb” indirect costs at the unit level, even though at the very nature they do NOT relate to it.

Question 6

What is “absorption cost”?

Answer 6

Absorption Costing or full costing is concerned with finding the full cost of a product or service.

Question 7

What is “absorption”?

Answer 7

Absorption means overheads charged to products or services by means of an Absorption Rate

Question 8

What is “absorption rate”?

Answer 8

Absorption Rate (AR) is the rate charged to a cost unit intended to account for the overhead at a predetermined level of activity

Question 9

Difference between “variable costing” and “absorption/ full costing”?

Answer 9

Variable costing notes all overheads as fixed costs and subtracts it as a lump sum. (SIMPLE)

Absorption/ Full costing attempts to allocate the overheads to the specific units. (COMPLEX)

Question 10

What are some advantages of “Full costing”?

Answer 10

1. It provides accurate data for decision-making.
2. It’s required for financial reporting in some cases.
3. It can help you price products more accurately (selling price).
4. It can help you identify areas where costs can be reduced.
5. It can help you track inventory more effectively.
6. It plays a crucial role in operational efficiency. You can track your production costs and cost of materials. Both are important direct costs that you need to know.

Question 11

What are some disadvantages of “Full costing”?

Answer 11

1. It can be time-consuming and complex to calculate full costs.
2. It may not be necessary for businesses with simple product lines.
3. It may not be the best method for decision-making in all cases.
4. It can lead to over-absorption of costs in some cases.
5. It may give you a false sense of precision.