Chapter 2 - Traditional costing Flashcards
What is a product cost?
Charged to individual product and matched against revenue generated in period sold.
What is included as part of product costs?
- Direct material
- Direct labour
- Direct expenses
- Absorbed production overheads
What is a period cost?
Charged in full to SPL for the period incurred
What is included in period costs?
- Admin costs
- Selling and distro costs
- Finance costs
What is the key difference between marginal and absorption costing?
Treatment of fixed production overheads
Absorption - product costs
Marginal - period cost
How is the production function divided?
- Production cost centres
- Service cost centres
What are the 3 steps used to calculated overhead absorption costs?
- Allocation and apportionment
- Reapportionment
- Absorption
What are the most common absorption bases?
- Units produced
- Machine-hour rate
- Labour-hour rate
What is the formula for the OAR?
Total budgeted overhead cost/Budgeted quantity of absorption base
How is over/under absorption calculated?
Overhead absorbed (actual x budgeted OAR) - actual overhead
What are the advantages of absorption costing?
- Matching concept followed
- Under/over useful for identifying inefficiency
- Fixed overhead necessary to include
What are the disadvantages of absorption costing?
- Apportionment and absorption of FOH is arbitrary
- Profits vary with changes in production volume
What makes up marginal cost?
- Direct material
- Direct labour
- Variable overheads
Are FOH included in marginal costing?
NO!!!
How is contribution per unit calculated?
Unit selling price - all unit variable costs
How is total contribution calculated?
Contribution per unit x sales volume
How is profit calculated?
Total contribution - FC
What are the advantages of marginal costing?
- Simple
- Reflects behaviour of costs in relation to activity
What are the disadvantages of marginal costing?
- treatment of direct labour costs as variable is unrealistic
- only useful for short-term, not long-term
What costing method gives the higher profit if inventory levels increase?
Absorption
What costing method gives the higher profit if inventory levels decrease?
Marginal
If inventory levels remain constant, which method gives the higher profit?
Both give the same
Which method gives the best profit long-term?
Both give the same
What is the formula for MC profit?
AC profit - change in inventory x FOH per unit
What are the 4 key factors to consider when making pricing decisions?
- costs
- competitors
- customers
- corporate objectives
What is the key determinant of selling price?
Cost
What is the formula for selling price under the full cost plus pricing method?
Full cost per unit x (1+mark up %)
How is mark up calculated?
As a % of costs
What is full cost?
Always includes full production cost and all absorbed overheads
What are the advantages of using full cost plus pricing?
- Useful for contract costing industries
- Quick and cheap to employ
What are the disadvantages of using full cost plus pricing?
- Selection of a suitable basis
- Mark up can be arbitrary
- Overheads may not be fully recovered
What is the formula for selling price under MC plus pricing?
MC per unit x (1+mark up %)
What are the advantages of using MC plus pricing?
- Just as accurate as full cost plus pricing
- Useful in pricing specific one-off contracts
What are the disadvantages of using MC plus pricing?
- Ignores external factors
- Mark-up becomes arbitrary
What is the formula for selling price using a profit margin?
Total cost/(1- required margin)
How is profit margin calculated?
As a % of sales
What is the formula for value of closing inventory?
(material cost + direct labour cost + production OH) x (Closing inv/production)
Does traditional costing under allocate overhead costs to low-volume products?
Yes
