Chapter 2: Traditional Costing Flashcards
What can the total costs of an organisation be categorised into?
Production Costs
Non-Production Costs
What can production costs be broken into?
Direct Costs
Indirect Costs
What is a direct cost?
Costs directly involved in production and attributable to each unit of production
What is an indirect cost?
Costs that can’t be directly attributed to each unit, such as rent, depreciation and supervisors
What are product costs?
Charged to the individual product and matched against the sales revenue they generate in the period in which they are sold.
What are period costs?
Costs which are charged in full to the statement of profit or loss in the period in which they are incurred.
What type of cost is fixed production costs in marginal costing?
Period Costs
What type of cost is fixed production costs in absorption costing?
Product Costs
How do you calculate the overhead absorption rate?
Budgeted overhead cost/Budgeted quantity of absorption base
How do you calculate if overheads have been under or over absorbed?
Overheads absorbed (OAR x actual units) - Actual overheads incurred
If positive then overheads have been over absorbed. If negative they have been under absorbed.
What are some advantages of absorption costing?
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
What are the disadvantages of absorption costing?
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
What are the advantages of marginal costing?
Simple
Avoids arbitrary allocation and absorption of overheads
Better for short-term decision making
Profits only rise if sales rise (not production)
What are the disadvantages of marginal costing?
Fixed overheads may be significant
Some direct costs may be fixed
How to calculate absorption costing or marginal costing using the other?
Absorption costing profit
(increase)/decrease in inventory x fixed overheads per unit
= Marginal costing profit