Chapter 2: Traditional Costing Flashcards

1
Q

What can the total costs of an organisation be categorised into?

A

Production Costs
Non-Production Costs

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2
Q

What can production costs be broken into?

A

Direct Costs
Indirect Costs

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3
Q

What is a direct cost?

A

Costs directly involved in production and attributable to each unit of production

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4
Q

What is an indirect cost?

A

Costs that can’t be directly attributed to each unit, such as rent, depreciation and supervisors

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5
Q

What are product costs?

A

Charged to the individual product and matched against the sales revenue they generate in the period in which they are sold.

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6
Q

What are period costs?

A

Costs which are charged in full to the statement of profit or loss in the period in which they are incurred.

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7
Q

What type of cost is fixed production costs in marginal costing?

A

Period Costs

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8
Q

What type of cost is fixed production costs in absorption costing?

A

Product Costs

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9
Q

How do you calculate the overhead absorption rate?

A

Budgeted overhead cost/Budgeted quantity of absorption base

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10
Q

How do you calculate if overheads have been under or over absorbed?

A

Overheads absorbed (OAR x actual units) - Actual overheads incurred

If positive then overheads have been over absorbed. If negative they have been under absorbed.

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11
Q

What are some advantages of absorption costing?

A

Fixed costs can be a significant part of total costs
This method is required for financial reporting processes
Under/Over-absorption can identify inefficient utilisation
There is an argument that in the longer term, all costs are variable

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12
Q

What are the disadvantages of absorption costing?

A

Requires arbitrary apportionment and allocation of overheads
The absorption basis may not actually drive the overhead cost
More complex then marginal costing
Encourages over-production

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13
Q

What are the advantages of marginal costing?

A

Simple
Avoids arbitrary allocation and absorption of overheads
Better for short-term decision making
Profits only rise if sales rise (not production)

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14
Q

What are the disadvantages of marginal costing?

A

Fixed overheads may be significant
Some direct costs may be fixed

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15
Q

How to calculate absorption costing or marginal costing using the other?

A

Absorption costing profit
(increase)/decrease in inventory x fixed overheads per unit

= Marginal costing profit

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16
Q

If inventory increases the profit would be higher under which costing method?

A

Absorption

17
Q

If inventory decreases the profit would be higher under which costing method?

A

Marginal

18
Q

If inventory stays the same the profit would be higher under which costing method?

A

Both profits are the same

19
Q

How to calculate selling price using absorption costing and a mark up?

A

Selling Price = full cost per unit x (1+ mark-up percentage)

20
Q

What are the advantages of using absorption costing and mark up to calculate selling price?

A

Ensures all production costs are covered
Can be used to justify price rises

21
Q

What are the disadvantages of using absorption costing and mark up to calculate selling price?

A

Ignores customers and competitors
Doesn’t reflect the incremental cost of new orders

22
Q

How to calculate selling price using marginal costing and a mark-up?

A

Selling Price = Marginal cost per unit x (1 + mark-up percentage)

23
Q

What are the advantages of using marginal costing and mark up to calculate selling price?

A

Useful for incremental orders
Avoid arbitrary overhead allocations

24
Q

What are the disadvantages of using marginal costing and mark up to calculate selling price?

A

Ignores customers and competitors
Doesn’t cover all costs in the long run

25
Q

How to calculate selling price using a margin?

A

Selling price = Total cost / (1 - required margin)