Chapter 1: Revision of MA topics Flashcards
What is the purpose of costing?
(4 points)
1) Value inventory- recorded in the BS
2) Record costs- recorded in P&L
3) Price products- make a profit
4) make decisions - what to make & quantity
What is standard costing
predetermined unit cost set under specified working conditions
What is the purpose of standard costing
1) Control-> investigate differences between actual vs standard
2) Planning-> help budget
3) Performance Management -> performance of cost center managers
4) Inventory valuation-> alternative to LIFO & FIFO
5) Accounting simplification -> only 1 cost
What organisation is Standard costing best used for?
Mass production of homogenous products & repetitive assembly work
Low human intervention
What is Mcdonaldisation
Each type of product made identically. Uses machines for drinks & pre-measured sauces
What is standard costs based on?
Expected use & price of material, labour & overheads
What are the 4 types of standard?
1) Attainable standards
2) Basic standards
3) Current standards
4) Ideal standards
What are attainable standards
Efficient but not perfect operating conditions
Allowances for normal material loss, fatigue, machine breakdowns etc
Most frequent type of standard
Motivate employees to work harder
Realistic but challenging target
What are Basic standards?
LT standards- unchanged over years
show trends overtime e.g material prices/ labour rates/ efficiency
Don’t highlight current efficiency
Can demotivate employees if too easy to achieve- bored & unchallenged
What are current standards?
Current working conditions
Useful when current conditions are abnormal
Don’t attempt to motivate employees - unchallenged
What are ideal standards?
Perfect operating conditions
No wastage/ scrap/ breakdowns/ idle time/ inefficiencies
Can have adverse motivational impacts- impossible to achieve
When are ideal standards used?
Japanese companies
Pinpoint areas for close examination where there could be large cost savings
What is a fixed budget?
Prepared before budget period
Single level of activity
What is a flexible budget?
Prepared before budget period
Number of levels of activity
Includes fixed & variable costs
What is a flexed budget?
End of the budget period
Estimate of costs & revenues based on actual level of output
What does budgetary control do?
Compares actual results vs expected = variance
Can be favorable (better than expected) or adverse
Can be shown in flexible budget statement (not the same as the flexible budget)
What is a controllable expense?
If a manager is responsible for it being incurred / authorise expenditure
Only evaluated on controllable expenses
What is absorption costing
Full production cost per unit
Production costs only
Shown in a cost card
What are prime costs
Total of all direct costs
What does a cost card look like
Direct labour cost per unit
Direct Material cost per unit
Production OH cost per unit
Full production OH per unit
Selling price per unit
Profit/ loss per unit
In absorption costing what are the 3 activity levels?
Units of production
Machine hours
Labour hours
What is the calculation for OAR? ( OH absorption rate)
OAR= Production OH total/ Activity level (you choose- units* activity level per unit)
What is the pre-determined OH absorption rate calculation?
Pre-determined OH absorption rate= budgeted OH/ Budgeted volume
What is budgeted volume
E.g Total units
Direct labour hours
Machine hours
What is over and under absorption?
Over- absorption= Absorbed > actual
Under- absorption= Absorbed< Actual
How do you calculate Over/ under absorption?
1) Calculate OAR = Budgeted OH cost/ Budgeted Activity level
2) Over absorbed= actual activity * OAR
3) OH absorbed (step 2) - actual OH= Over/ Under absorbed
What is marginal costing
Variable costs are charged to cost units
Fixed costs written off against aggregate contribution
What is marginal cost
Extra cost of making & selling 1 more unit
or
saving by making & selling 1 less unit
What is contribution
*-+Sales value- variable cost
aka contribution to fixed costs & profits
In marginal costing it varies in direct proportion to volume of units sold*=097542qac
Advantages of absorption costing
1) Element of fixed overheads in accordance with IAS2
2) Analysing over/ under absorption can help with cost control
3) Small organisations = absorbing OH into cost of products is good at estimating job costs & profits
What is the disadvantage of absorption costing
More complex than marginal costing
no useful info for decision making
Advantages of Marginal Costing
Contribution per unit is constant
No over/ under absorption –> no adjustments on P&L
Fixed costs are a period cost–> charged in full to period under consideration
Good for decision making
Simple
Disadvantages of Marginal costing
Closing inventory isn’t valued in accordance with IAS 2 principles
Fixed production OH not shared between units of production but written off
