Chapter 28 Cost A2 Flashcards
What are cost centers?
Cost centers are a section of business, such as a department, to which costs can be allocated or charged.
Examples of cost centers are:
1 in a hotel: the restaurant, reception, bar, room letting and conference section.
2 in a school: different subject departments.
What are Profit centers?
Profit centers are a section of a business to which both costs and revenues can be allocated – so profit can be calculated.
Examples of profit centres are:
1 Each branch of a chain of shops, e.g. Taste at Tung Chung
2 In a multi-product firm, each product in the overall portfolio of the business, e.g. Apple’s iPad and iPhone
What are the groups Overheads are classified into?
They are usually classified into four main groups: 1 production overheads 2 selling and distribution overheads 3 administration overheads 4 finance overheads
What is unit cost?
This is the average cost of producing each unit of output
How to calculate unit cost?
Unit cost = total cost of producing a product
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number of units produced
What is Full/absorption costing?
Full/absorption costing is a method of costing in which all fixed and variable costs are allocated to products or services.
What is Marginal or contribution costing?
Marginal or contribution costing is a costing method that allocates only direct costs to cost/profit centers, not overhead costs.
1 Marginal cost is the cost of producing 1 extra unit
2 Contribution of a product is the revenue gained (price) from selling a product less its marginal cost (variable direct) cost
Evaluate Full costing?
1 Useful for single-product firms
2 Not useful for multi-product firms
3 Final costing figure may be inaccurate or misleading
Evaluate Marginal or contribution costing
1 Most widely used method
2 It is accepted that fixed costs must be paid at all times (even when production/output is low)
3 Assists managers about whether to accept a below full cost order or not
4 BUT overheads must be considered (contribution is not profit)
