chapter 33

Question 1

unit cost

Answer 1

the average cost of producing one unit of a product or service

Question 2

absorption costing

Answer 2

a method for calculating the cost of making one unit of a product that involves apportioning overheads into cost units

Question 3

cost centre

Answer 3

any part of a business to which costs may be attributed, such as department. cost centres are a useful aspect of management accounting that help to control expenditure

Question 4

how does knowing the unit cost of each product help

Answer 4

it helps management to plan and control its costs and to make good decisions about its operation and products. one very important decision is what selling price it should charge for its products

Question 5

how can unit cost be found if there is one type of good produced

Answer 5

the unit cost can easily be found simply by dividing the total factory cost by the total factory cost by the numbers of units produced. calculating the unit cost needs to be different for businesses that make more than one type of product

Question 6

production cost centres

Answer 6

cost centres directly involved in producing goods

Question 7

service cost centres

Answer 7

cost centres that are not involved in the production of goods but services for the production cost centres

Question 8

two types of cost centres

Answer 8

production cost centres
service cost centres

Question 9

allocation of costs

Answer 9

charging overheads directly to the cost centres that can be clearly identified with them

Question 10

apportionment of costs

Answer 10

the process of charging costs that cant be identified with specific cost centres to cost centres using a suitable basis

Question 11

suitable basis of apportionment of heat and lighting

Answer 11

floor area

Question 12

suitable basis of apportionment of insurance of plant, machinery and other assets

Answer 12

cost or replacement values of assets

Question 13

suitable basis of apportionment of depreciation

Answer 13

cost or net book value of assets

Question 14

elimination method of apportioning service cost centre overheads

Answer 14

firstly , the costs from one of the service departments are apportioned to the other costs centres. that service department cost centre is then eliminated from future apportionments
secondly, the costs from the next service department must be apportioned to the remaining cost centres. that service department cost centre is then eliminated from future apportionments
if there are more than two service cost centres, the process is repeated until the last service cost is apportioned to the production cost centres

Question 15

overhead absorption rate (OAR)

Answer 15

the rate at which overheads apportioned to a cost centre are charged to the cost unit passing through it

Question 16

why are OAR are calculated

Answer 16

they are calculated for future periods. they can be used to decide future selling prices for the products. calculations are based on planned volumes of output and budgeted or forecast overhead expenditure

Question 17

methods of calculating OAR

Answer 17

units of output method
direct labour hours method
machine hours method

Question 18

units of output method

Answer 18

this method is most suitable for a business that produces one product only. the result will be an OAR unit

Question 19

how is OAR calculated through units of output method

Answer 19

budgeted overheads/budgeted number of units.

Question 20

direct labour overhead absorption rate method

Answer 20

this method can be used by a business that produces more than one product. this method should be used where a cost centre is labour intensive. a cost centre is labour intensive when it relies more heavily on labour than machinery and the labour cost is greater than the cost of using machinery. results in OAR per direct labour

Question 21

direct labour overhead absorption rate formula

Answer 21

budgeted overheads/budgeted direct labour hours

Question 22

machine hour overhead absorption rate method

Answer 22

this method can also be used by a business that produces more than one product. this method should be used where a cost centre is capital intensive. this will result in OAR per machine hour

Question 23

machine hours overhead absorption rate formula

Answer 23

budgeted overheads/budgeted machine hours

Question 24

how can a cost centre be capital intensive

Answer 24

when it relies more heavily on machinery than labour and the cost of using machinery is greater than labour cost.

Question 25

over absorption

Answer 25

if production is more than planned or expenditure is less than budgeted, too much overhead will be charged to production

Question 26

under absorption

Answer 26

where production is less than planned or expenditure is more than budgeted, not enough overhead will be charged to production

Question 27

when does under absorption occur

Answer 27

actual expenditure is higher than budgeted expenditure
and/or the actual production level is less than the planned level. in this case, no enough overhead has been charged to production

Question 28

when does over absorption occur

Answer 28

actual expenditure is lower than budgeted expenditure
and/or the actual production level is more than the planned level. in this case, too much overhead has been charged to production

Question 29

why does over or under recovery need to be monitored

Answer 29

it impacts on the profit of a business

Question 30

using absorption costing to decide selling price

Answer 30

once the unit cos has been calculated, it is possible to add an element of profit to arrive at a possible selling price for each product. the addition of something for profit is designed to cover all other overheads incurred by the business and leave some profit for the business

Question 31

usefulness of absorption costing

Answer 31

absorption costing is a useful method of calculating the unit cost. as well as using the unit cost as a basis to set selling prices, the unit cost can also be used by management to inform many decisions about costs such as whether to cut costs or spend money

Question 32

why do managers must also consider financial factors when making decisions regarding selling price

Answer 32

non financial factors can be many and varied, and will depend on the circumstances in which the business finds itself. a business’s relationship with its customers or the actions of competitors may affect the selling price that a business chooses, while the skills and experience of employees may affect decisions to cut staff costs

Question 33

what is the information used in absorption costing based

Answer 33

based on planned or budgeted information about the future rather than historic figures. this is necessary so that the business can use the information to make decisions such as what selling prices to charge.

Question 34

why should costing information be regularly updated

Answer 34

using budgeted information means that numbers used are not likely to be wholly accurate and are subjected to change over time.

Question 35

benefits of absorption costing

Answer 35

Absorption costing is useful for long-term decisions such as selling prices because the fixed costs of a business must be covered if it is to be profitable.

Inventory can be valued using absorption costing and so can be used when preparing a business’s financial statements.

Absorption costing is straightforward to calculate where there is only one product. It is also more straightforward to calculate than activity-based costing

Question 36

Limitations of absorption costing

Answer 36

The bases of apportionment are often generalized. Activity-based costing can be a more realistic method

Under-absorption and over-absorption of overheads can arise. This impacts on the accuracy of the profits reported.

Other costing methods are more useful for short- term decision making