Book: Costing & Cost Assignment Flashcards
Direct material costs
The cost of materials tied to a specific product
Explain direct labor cost
The cost of labor that facilitates a specific product or service
Indirect cost
Costs that cannot be tied to a specific product or service t.ex power and repair costs
Overhead
Indirect costs categorized by functional area
Prime cost
Direct material + direct labor costs
Manufacturing costs
Direct material + direct labor + manufacturing overhead
Conversion cost
Direct labor cost + manufacturing overhead, the cost if converting materials into products
What constitutes non-manufacturing costs
Administrative overheads + Marketing overhead (order related costs)
What is the benefit with direct costs when it comes to cost assignment
Only direct costs can be precisely accurately assigned to a cost object
What is the difference between fixed and variable costs
fixed costs stay the same no matter the level of activity while variable costs varies based on the activity (short term)
Unit fixed cost
Fixed cost per unit, economies of scale. Decreases logarithmically when production increases
Semi fixed or step fixed costs
Fixed costs over long time may vary if capacity is reached, often in the form of a staircase
Direct cost tracing
Allocate direct cost to its related cost object
Allocation base/cost driver
Allocate costs based on percentages of receipts associated with a cost object
Cause and effect allocation / driver tracing
Allocation of cost that is required for cost object. If no cost object no cost
Arbitrary allocation of cost
Weak link between cost and cost object
Direct costing system
Only allocates direct costs
Absorption costing system
Allocates all costs
Traditional costing system
Absorption costing system using arbitrary allocation mostly
ABC costing system
Activity based costing, absorption costing system that tries to avoid arbitrary allocations
When it is better to have a highly sophisticated cost allocation system
When much of the cost is indirect
What is plant wide or blanket overhead rate
To allocate all costs of a plant to a single allocation base like labor hour that is then used to allocate cost indirect costs so f.ex cost of product based on labor hours it takes
cost pool or cost center
A temporary pool where overheads are allocated before they are allocated to cost objects, often departments. Also called cost drivers
Two stage allocation process
The process of first allocating costs to a driver t.ex a department before it is allocated to a cost object
What is mainly distinguishes the abc system of calculating cost functionaly
ABC has more cost centers and drivers dividing the overhead by activities
Does cost allocation improve decision making
Not necessarily, it has to be accurate and relevant to be worth it
Do all costs need to be allocated
No, if they are not relevant for decision making leave them out
Does idle capacity costs need to be allocated to products
In theory it would be proper but it could motivate price increases which would be counterproductive as fewer purchases means more idle facilities incurring costs
Over and under recovery of overhead
When activity or expenditure differs from budget
Volume variance
Fixed overhead variance that arises from activity variating from budget
Fixed overhead expenditure variance
Overhead expenses varying from budget
Should you allocate over or under recovery to products
No
Why is it important to allocate costs to products
To evaluate inventory and cogs as well as to give managers an overview of the worth and potential of different products
Why should budget overhead rates be used instead of the actual ones
Because using actual data would cause a delay as well as arbitrary fluctuations in overhead rates causing overcomplexity. More cost effective to use annual averages
What is done in n over or under recovery
It is recorded as a period cost adjustment and written of as a profit or a loss that is not allocated to products
How may non manufacturing organizations without products allocate costs
Either they allocate the costs to a service or they may allocate costs to departments synonymous with the service
How do you calculate budget over or under absorption of overhead
You check the difference between volume variance and fixed overhead expenditure variance. Aka actual amount * budgeted price - actual overhead
Volume variance
Difference in volume * value
Fixed overhead expenditure variance
Budgeted overhead - actual overhead
Is over absorption a decrease in actual overhead
Yes
When calculating overhead absorption should you include prime cost
No only fixed and variable overheads divided by suitable unit
How do you know what attributes to allocate by when calculating a suitable overhead absorption rate.
Take the dominant attribute of the department or activity, don’t have to be the same over all.
Overhead rate / activity cost
Percentage of overhead divided by cost of activity per allocated unit. Can also be expressed as cost of activity / mesuring number that foes not have to be the same for all activities. $part/hpart or $overhpart/$machinepart
