Applied Management Accounting Flashcards
Advantages of Activity Based Costing
*Costs are better understood.
*Costs are better absorbed.
*Pricing decisions can be improved.
*Decision making can be improved.
*ABC can be used in service industries.
Disadvantages of Activity Based Costing
*Arbitrary cost apportionments are still required.
*Limited benefit if the overhead costs are a small proportion of the overall cost.
*It is impossible to allocate all overhead costs to specific activities.
*It can be costly to implement.
*The choice of activities and cost drivers might be inappropriate.
Traditional Costing Formula
Cost + Profit = Selling Price
Target Costing Formula
Selling Price - Profit = Costs
Overhead Absorption Rate Formula
Budgeted Fixed Overhead/Budgeted Hours
Favourable Conditions For Activity Based Costing
*Production overheads are high relative to direct costs.
*Diversity in the product range.
*Diversity of overhead resource input to products.
*Consumption of overhead resources is not driven primarily by volume.
Target Cost Gap Formula
Estimated Product cost - Target Cost
Life Cycle Cost Per Unit Formula
Total Costs Over Its Entire Life/Total Number Of Units
What is an Opportunity Costs?
The value of the benefit sacrificed when on course of action is chosen, in preference to an alternative.
Opportunity Cost is represented by the forgone potential benefit from the best rejected course of actions.
Define Sunk Costs?
Expenditure that has already been incurred and therefore will not be relevant to the investment decision.
Define Committed Costs?
Expenditure that will be incurred in the future, but as a result of decisions taken in the past that cannot now be changed.
Define Non Cash Flow Costs?
Depreciation and carrying amounts are accounting concepts, not actual cash flows and are not relevant costs.
Define Relevant Costs?
Costs that are only incurred if a decision is taken to proceed with future development.
Qualitative factors that should be taken into account when making decisions.
*Impact on employee morale
*Alternative use of resource
*Quality
*Reliability
*Competitor Reaction
*Customer Reaction
*Loss of specialist skills
Trend Analysis: Formula for seasonal variation
Actual = Trend + Seasonal Variation
