Chapter 6 - Marginal, Absorption And Activity Based Costing Flashcards
What is Marginal cost ?
Marginal cost is the cost of producing one extra unit of output
What can Marginal costing help with ?
Short term desicion making
For most purpouses Marginal costing focuses on the ………… costs rather than the fixed period costs.
Variable product costs
List what falls under Variable product costs
- Direct materials
- Direct labour
- Direct expenses
- Variable production overheads
What does knowing the marginal cost of a unit of output allow managers of a business to focus on ?
the contribution provided by each unit
What is contribution ?
Contribution is the amount of earning remaining after all direct costs have been subtracted from the revenue.
What is the calculation to work out contribution ?
Selling price - Variable cost = Contribution
What do you take away from the total contribution to work out the Operating profit ?
You take away the fixed production costs from the total contribution to work out the operating profit
(Total contribution - Fixed production costs = Operating Profit
How does activity based costing charge its overheads ?
Activity based costing (ABC) charges overheads to production on the basis of activities
What are cost drivers ?
Cost drivers are activities that cause costs to be incurred
What are cost pools ?
Cost pools are groups of overhead costs that are incurred by the same activity
What is the main use of marginal costing ?
- To help with short term decision making
- break-even analysis
- margin of safety
- target profit
- contribution
- special order pricing
What is the main use of absorption costing ?
- Calculating selling prices using cost plus profit
- to calculate inventory valuation for financial statements
What is the main use of activity based costing ?
To identify what causes overheads to be inccured for a particular activity
What are the main focuses of marginal costing ?
- Marginal cost
- Contribution
What are the main focuses of absorption costing ?
- Production overheads charged to production
- Calculating selling prices and profit
- Calculating inventory values
What are the main focuses of activity based costing ?
Identifying the cost drivers and cost pools as a way of charging production overheads to production
