6. Marginal, Absorption & Activity Based Costing Flashcards
Differences Marginal and Absorption costing?
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?”
What is marginal cost
Cost of producing 1 extra unit of output.
Marginal cost per unit comprises
Variable costs:
Variable direct materials.
Variable direct labour.
Variable direct expenses.
Variable overheads (ie split production OHs ..include variable not fixed)
Absorption cost comprises
Direct materials.
Direct Labour.
Direct expenses.
Production overheads (Fixed and variable)
Do not include Non-production overheads.
What not to include in absorption cost?
Non-production OHs
Define activity based costing
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.
Product costs and period costs…
Product costs - costs become part of the manufactured product.
Period costs - costs cannot be assigned to the manufactured product.
What does knowing the marginal cost allow calculation of ?
The contribution. (Selling price less variable cost)
Contribution can be calculated on per unit basis, or batch or even whole business..
.
When looking at SPL comparing Marginal costing to Absorption costing where is the difference?
With marginal costing the value of closing inventory is lower because it includes only variable costs (no absorbed fixed OHs)…
This means COS is higher and so profit is lower.
This is only if there is closing stock being carried forward to next period… because with absorption costing some of the fixed overheads would be carried forward also as they are ‘attached’ to the closing stock.
What are cost drivers
Activities which cause costs to be incurred.
What are some examples of cost drivers
Activity. Cost driver
Set-ups. Number of set ups.
Quality control. Number of inspections.
Marketing. Number of adverts.
Processing docs. Number of orders, invoices etc
When is activity based costing best
Capital-intensive industries where OHs are high and complex in nature.
