Chapter 3: Types of Costing Systems Flashcards
What are the five types of costing systems?
- Absorption costing
- Marginal costing
- Batch costing
- Job costing
- Service costing
Define contribution and how you would calculate it.
Contribution is the amount of money from each unit that helps cover fixed costs.
Contribution = Sales revenue less all variable costs
Define prime cost and how you would calculate it.
Prime cost is the total cost directly associated with the production of a specific unit.
Prime cost is the total of all direct costs. (direct materials + direct labour + direct expenses)
Define marginal cost and how you would calculate it.
Marginal cost is the cost to make one additional unit.
Marginal cost = prime cost (direct material + direct labour) + variable production overheads
What is the main difference between marginal and absorption costing?
Marginal costing values each unit of inventory using variable production cost whereas absorption costing uses full production cost.
Absorption costing also uses OAR.
List the three advantages of absorption costing
- It adheres to IAS 2 (International Accounting Standard)
- The total production cost is considered
- The under or over-absorption of overheads is useful for controlling costs
What will differ due to the differences in unit valuation? (Absorption vs marginal costing)
Profits will differ
What is the equation for calculating the number of units of closing inventory?
Closing inventory units = opening inventory units + production units - sales units
What is the equation for calculating the marginal cost per unit?
Marginal production cost per unit = prime cost per unit + variable production overheads per unit
What is the equation for calculating the absorption cost per unit?
Absorption cost per unit = marginal cost per unit + fixed production overheads per unit
What type of costing is job costing and when is it used? Give examples.
Job costing is a form of specific order costing.
It is used when each job is different and has different inputs of materials and labour.
E.g construction, vehicle repairs, event planning
What type of costing is batch costing and when is it used? Give examples.
Batch costing is a form of specific order costing.
It is used when a business produces batches of identical units.
E.g clothing factory where they make different size batches of different items
What type of costing is service costing and when is it used? Give examples.
Service costing is a form of continuous operation costing.
It is used for businesses that don’t have a tangible product or for perishable products.
E.g PR, restaurants and fruit and veg
Define absorption cost and how you would calculate it.
Full production cost.
All fixed costs plus all variable costs
