AMA Q22 - Chapter 1 Flashcards
What is the prime cost of a product/service?
The total value of all direct costs
Another way of saying ‘Indirect Costs’
Overheads
The two ways a factory cost centre can be categorised
- Production centre - direct production of cost units
- Service centre - servicing a production centre
Three main methods of costing?
- Absorption - All production costs are included in unit cost, including overheads
- Marginal - indirect costs are not attributed to unit cost but go to P&L separately
- Activity based -
What does OAR stand for?
Overhead Absorption Rate
How do you calculate OAR?
fixed cost value / activity level (i.e. machine hours)
Over-absorption of overhead costs
actual costs were lower than expected
Under-absorption of overhead costs
actual costs were higher than expected
Another name for marginal costing
Variable costing
What happens to fixed costs in marginal costing?
They are added as a cost to P&L for the period they were incurred; ignored
What is the contribution?
revenue - direct costs (basically gross profit)
Two ways contribution can be looked at
- Unit level
- Period level
Does marginal costing factor fixed costs?
Only the variable element of fixed costs
Is the value of inventory higher or lower using marginal costing?
Lower, because the inventory value does not include fixed costs
Under absorption costing, is profit higher or lower under increasing inventory levels?
Higher, because fixed costs are spread across more cost units
What happens to the fixed costs absorbed in closing inventory?
the fixed costs absorbed in the units are carried forward to the next accounting period
Name an advantage of Marginal Costing
- Easier to understand in P&L
- Easier to isolate impact of variable costs
- No over or under absorption
Name an advantage of Absorption Costing
- Shows the relationship between fixed costs and unit cost
- closing inventory value is accurate and in line with reporting standards
How does capital expenditure become revenue expenditure?
Through depreciation
