Chapter 4

Question 1

Full cost definition

Answer 1

total amount of resources usually measured in monetary terms sacrificed to achieve an objective

Question 2

Why do managers want to know full cost? (4)

Answer 2

pricing and output decisions
Exercising control (starting point to see if too costly)
Assessing relative efficiency (compare operations)
Assessing performance - revenue vs costs

Question 3

Process costing used for:

Answer 3

brick, paint, oil manufacturing etc

Question 4

What is process costing?

Answer 4

full cost for single product business - add all elements of cost incurred over a period and divide by output, including unfinished percentage

Question 5

Direct Cost definition

Answer 5

can be traced to specific cost unit and measured reliably

Question 6

Indirect Cost definition

Answer 6

all other elements of cost that cannot be indentified with each particular cost unit. must have a cost objective indetified

Question 7

Selecting overhead absorption rate - 5 points

Answer 7

choice is a matter of judgement
nature of overhead should influence it
overheads charged same for different jobs
total overheads same regardless of what is used
can segment overheads into different cost centres before apportioning general overheads

Question 8

What about marketing and distribution costs?

Answer 8

must be charged at period incurred as in accordance to international accounting standards and therefore do not apply to full cost.
although can be sometimes if can be apportioned fairly

Question 9

CIMA survey shows what?

Answer 9

full costing used more by larger businesses

Question 10

Issues with full costing

Answer 10

1. Not designed for modern automated tech environment where overheads larger than direct cost so errors more significant
2. based on correlation, not causation
3. different ORR give different answers

if done in advance, prone to errors in overhead recovery so must be adjusted for on income statement
if done on past costs, then not relevant

Question 11

Full cost is seen as

Answer 11

long run average cost of a product

Question 12

Variable costing vs Full Costing

Answer 12

VC highlights CVP relationship more clearly, helpful in short run
VC helpful in short run as focuses on what can be changed
FC must be used for reporting
FC - profit influenced by sales and production so fairer measure of profit item by item. needs fair share of all costs