Chapter 2 - Traditional costing

Question 1

What is a product cost?

Answer 1

Charged to individual product and matched against revenue generated in period sold.

Question 2

What is included as part of product costs?

Answer 2

• Direct material
• Direct labour
• Direct expenses
• Absorbed production overheads

Question 3

What is a period cost?

Answer 3

Charged in full to SPL for the period incurred

Question 4

What is included in period costs?

Answer 4

• Admin costs
• Selling and distro costs
• Finance costs

Question 5

What is the key difference between marginal and absorption costing?

Answer 5

Treatment of fixed production overheads

Absorption - product costs
Marginal - period cost

Question 6

How is the production function divided?

Answer 6

• Production cost centres
• Service cost centres

Question 7

What are the 3 steps used to calculated overhead absorption costs?

Answer 7

1. Allocation and apportionment
2. Reapportionment
3. Absorption

Question 8

What are the most common absorption bases?

Answer 8

• Units produced
• Machine-hour rate
• Labour-hour rate

Question 9

What is the formula for the OAR?

Answer 9

Total budgeted overhead cost/Budgeted quantity of absorption base

Question 10

How is over/under absorption calculated?

Answer 10

Overhead absorbed (actual x budgeted OAR) - actual overhead

Question 11

What are the advantages of absorption costing?

Answer 11

• Matching concept followed
• Under/over useful for identifying inefficiency
• Fixed overhead necessary to include

Question 12

What are the disadvantages of absorption costing?

Answer 12

• Apportionment and absorption of FOH is arbitrary
• Profits vary with changes in production volume

Question 13

What makes up marginal cost?

Answer 13

• Direct material
• Direct labour
• Variable overheads

Question 14

Are FOH included in marginal costing?

Answer 14

NO!!!

Question 15

How is contribution per unit calculated?

Answer 15

Unit selling price - all unit variable costs

Question 16

How is total contribution calculated?

Answer 16

Contribution per unit x sales volume

Question 17

How is profit calculated?

Answer 17

Total contribution - FC

Question 18

What are the advantages of marginal costing?

Answer 18

• Simple
• Reflects behaviour of costs in relation to activity

Question 19

What are the disadvantages of marginal costing?

Answer 19

• treatment of direct labour costs as variable is unrealistic
• only useful for short-term, not long-term

Question 20

What costing method gives the higher profit if inventory levels increase?

Answer 20

Absorption

Question 21

What costing method gives the higher profit if inventory levels decrease?

Answer 21

Marginal

Question 22

If inventory levels remain constant, which method gives the higher profit?

Answer 22

Both give the same

Question 23

Which method gives the best profit long-term?

Answer 23

Both give the same

Question 24

What is the formula for MC profit?

Answer 24

AC profit - change in inventory x FOH per unit

Question 25

What are the 4 key factors to consider when making pricing decisions?

Answer 25

• costs
• competitors
• customers
• corporate objectives

Question 26

What is the key determinant of selling price?

Answer 26

Cost

Question 27

What is the formula for selling price under the full cost plus pricing method?

Answer 27

Full cost per unit x (1+mark up %)

Question 28

How is mark up calculated?

Answer 28

As a % of costs

Question 29

What is full cost?

Answer 29

Always includes full production cost and all absorbed overheads

Question 30

What are the advantages of using full cost plus pricing?

Answer 30

• Useful for contract costing industries
• Quick and cheap to employ

Question 31

What are the disadvantages of using full cost plus pricing?

Answer 31

• Selection of a suitable basis
• Mark up can be arbitrary
• Overheads may not be fully recovered

Question 32

What is the formula for selling price under MC plus pricing?

Answer 32

MC per unit x (1+mark up %)

Question 33

What are the advantages of using MC plus pricing?

Answer 33

• Just as accurate as full cost plus pricing
• Useful in pricing specific one-off contracts

Question 34

What are the disadvantages of using MC plus pricing?

Answer 34

• Ignores external factors
• Mark-up becomes arbitrary

Question 35

What is the formula for selling price using a profit margin?

Answer 35

Total cost/(1- required margin)

Question 36

How is profit margin calculated?

Answer 36

As a % of sales