Chapter 7 Reading Flashcards
what are the two types of cost accounting choices?
- stock-costing choices
- denominator-level choices
stock-costing choices = ?
choices that relate to which costs are to be recorded as stock when they’re incurred
two alternative stock costing choices: variable / absorption costing
denominator-level choices = ?
the choices that relate to the pre-selected level of the cost allocation base used for setting budgeted fixed manufcaturing cost rates
four alternatives include: theoretical capacity/practical capacity/ normal utilisation/ master-budget utilisation
what are the two most commonly encountered methods of costing stock?
- variable costing
- absorption costing
absorption costing = ?
the required method under GAAP for external reporting in most countries
management accountants most frequently use…
variable costing for decision making and performance evaluation purposes
inventoriable costs = ?
costs related to product rather than expenses on a period basis
difference between variable and absorption costing?
absorption costing - fixed overhead’s classed as product cost
variable costing - fixed overhead’s classed as period cost
variable costing = ?
a method of stock costing in which all variable manufacturing costs are included as inventoriable costs
all fixed manufacturing costs are excluded from inventoriable costs; they’re costs of the period in which they’re incurred
absorption costing = ?
a method of stock costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs
stock ‘absorbs’ all manufacturing costs
period cost = ?
cost associated with the period
unaffected by number of goods manufactured
product costs = ?
cost associated with number of goods manufactured
e.g., cost is £100,000, 100 units produced … product cost is £1,000 per unit
contribution margin = ?
sales - variable costs
when is a contribution margin used and when is a gross margin used?
contribution margin used for variable-costing income statements (sales - variable costs)
gross margin used for absorption costing income statements (sales - COGS)
standard costing system = ?
uses budgeted estimates for both variable and fixed costs
absorption-costing operation profit - variable costing operation profit = ?
fixed manufacturing costs in closing stock - fixed manufacturing costs in opening stock
sunk cost = ?
a cost that has already been incurred and cannot be recovered
sunk costs should be irrelevant to decision making
capacity = ?
constraint and upper limit
theoretical capacity?
the denominator-level concept that is based on the production of output at full efficiency for all of the time
e.g., company produces 2400 units per hour during 8 hr shifts … 2400 x 8 = …
theoretical as it doesn’t account for potential incidental setbacks (e.g., breakages)
practical capacity = ?
denominator-level concept that reduces theoretical capacity for unavoidable operating interruptions (e.g., schedules maintenance time, holidays etc)
practical as it accounts for potential pauses in production
theoretical & practical capacity measure denominator in terms of what plant can supply, normal & master-budget utilisation measure denominator in terms of…
demand fo the output of the plant
normal utilisation = ?
denominator-level concept based on the level of capacity utilisation that satisfies average customer demand over a period (e.g., 2-3 yrs)
master budget utilisation = ?
denominator-level concept based on the anticipated level of capacity utilisation for the next budget period
