Accounting Topic 4 (Costing Techniques: Absorption and Activity Based)

Question 1

decision making

Answer 1

using financial statements:
- costing
- pricing decisions
-operating decisions

Question 2

control

Answer 2

budgeting
variance analysis

Question 3

4 objectives of costing

Answer 3

1. stock valuation
2. cost control
3. pricing and output decisions (profit is leftover)
4. assessing performance (bonuses)

Question 4

stock valuation

Answer 4

amount of inventory that you see on balance sheetc

Question 5

cost control

Answer 5

especially in conditions of high inflation
control = dictate if company is successful

Question 6

classifying costs

Answer 6

total costs - direct and indirect
fixed
variable (based on output)

Question 7

direct costs

Answer 7

traceable
identified specifically and exclusively with a given cost objective in economically feasible way

Question 8

indirect costs

Answer 8

not readily traceable
cant be identified specifically and exclusively with a given cost objective in an economically feasible way

Question 9

overhead allocation

Answer 9

process of spreading production overhead (indirect costs) over the volume of production

Question 10

what is the overhead allocation problem

Answer 10

overheads can be arbitrarily allocated across product/service
lead to inappropriate pricing and misleading info about product/service profitability

Question 11

methods of overhead allocation

Answer 11

indirect costs - allocated using cost allocation base
1. absorption costing
2. activity based costing

Question 12

allocation process for absorption

Answer 12

1. tend to allocate costs to departments
2. rely on small number of volume based cost drivers (direct labour/machine hours)

Question 13

allocation process for ABC

Answer 13

1. allocate costs to activities
2. many second stage cost drivers

Question 14

Activity based costing

Answer 14

• overheads traced through their drivers to the product that consume those activities
• more overheads = incurred = more allocated
• more relevant costing in companies with higher overheads

Question 15

drivers

Answer 15

causes of activity

Question 16

cost pools

Answer 16

• use cost pools to accumulate cost of significant business process or activities
  -assigns costs from cost pools to products based on cost drivers
• pools go up if more customers
• more products sold = allocate that cost pool to group
  -manager must assess if the cost pools are accurate

Question 17

absorption costing

Answer 17

all overheads are added together
costs allocated based on number of labour hours

Question 18

emergence of ABC systems, when does a company adopt this system? 5 reasons

Answer 18

1. when indirect costs are high
2. set optimal product mix
3. estimate profit margins
4. decrease costs associated with bad decisions
5. take advantage of reduced cost of ABC systems due to computer tech

Question 19

4 criticisms of ABC

Answer 19

1. time consuming & costly
2. not all businesses are likely to benefit from ABC
3. measurement & tracing problems can arise
4. relationship between activity costs and cost drivers are difficult to determine

Question 20

designing an activity based costing system
4 steps

Answer 20

1. identify major activities that take place in org - aggregate activities
2. assign costs to cost pools/cost centres for each activity
   - directly and indirectly attributable to activity
3. determine cost driver or each major activity
4. assign the cost of activities to products according to product’s demand or activities

Question 21

different drivers

Answer 21

activity - provide good explanation of costs and easily measurable

transaction - number of purchases/inspections

duration - set up hours/inspection hours

Question 22

when is ABC relevant

Answer 22

when volumes between 2 products are very different
with materials