Chapter 16 - Accounting For Overhears And Product Costs Flashcards
- Distinguish between traditional full costing , activity based costing and marginal costing and the way in which overheads are accounted for in product costing. - Understand the importance of sharing overheads to product cost on an equitable basis using activity based costing and absorption costing. - Recognize the impact on profits in using absorption costing, activity based costing and marginal costing.
Reasons why management requires product costing information:
- To control costs
- To aid planning
- For valuing inventories
- To aid the setting of selling prices
- To ascertain the relative profitability of products
Key Concept: Direct and indirect costs
A direct cost is one that is traceable, and thus attributable, to a product. Indirect costs, also known as overhead costs (Gemeinkosten), are those that cannot be easily and conveniently identified with a particular product.
Key Concept: Full costing
The full cost of a product consists of the direct and indirect costs of production.
Definition: Period Costs
Any costs not categorized as product costs
The most common activity measures used to absorb overheads into product costs:
- direct labor hours
- direct labor costs
- machine hours
- cost of materials
- units produced
Key Concept: Activity-based costing
Activity-based costing recognizes the complexity of business activities, the nature of the overheads and what drives or causes them.
The main ideas that underpin activity based costing are:
- Activities cause costs - activities include ordering, materials handling, machining, assembly, production scheduling and dispatching
- Producing products creates demand for activities
- Costs are assigned to a product on the basis of the products consumption of the activities
Steps in calculating product costs:
- Identify major activities, e.g. machining, production runs and orders.
- Collect the overhead costs in a cost pool for each major activity.
- Determine the cost drivers for each activity:
- machining - cost per machine hour
- production runs - cost per set-up
- number of orders - cost per order
- Trace the cost of the activities to the product, using the cost drivers as a measure of demand
Key Concept: Marginal costing (Teilkostenrechnung)
Only direct production costs are included as product costs in marginal costing.
