Absorption & Marginal Costing

Question 1

Cost centre

Answer 1

A department or division that incurs costs

Question 2

Which service cost centre to apportion first under direct method ?

If the question is silent

Answer 2

Service cost centre with the highest cost

Question 3

In which order will we apportion service cost centre that do not provide services to other service cost centres ?

Answer 3

LAST

Question 4

Overhead absorption rate

Answer 4

Rate at which total production overhead costs are added to the cost per unit of each product.

Question 5

Advantages of using predetermined OAR

Answer 5

• Facilitate management decision
• Help decide which product to make
• Decide what price to sell

Question 6

Is the cost of non-production overhead included in inventory valuation

Answer 6

NO

Under IAS 2 Inventories, cost of non-production overheads should not be included in inventory valuation

Question 7

How does marginal costing value inventory

Answer 7

Variable production cost only

Question 8

Advantages of Absorption Costing

Answer 8

• Inventory value complies with the relevant accounting standards for external financial reporting
• Considers all costs (better understanding of whole picture)
• More appropriate when considering long-term decisions because it considers long-term fixed cost

Question 9

Advantages of marginal costing

Answer 9

• Highlights contribution (helps management focus on a decision’s short-term financial impact)
• Focuses on the immediate and direct impact of an action or decision
• More appropriate for short-term decision

Question 10

Disadvantages of absorption costing

Answer 10

• Overemphasises the importance of costs that do not change regardless of the course of action —> lead to inappropriate decision

Question 11

Disadvantages of marginal costing

Answer 11

• Inventory value produced is unsuitable for financial accounting (doesn’t comply with relevant accounting standard)
• Decisions’ long-term impact and broader implications are not considered.