Chapter 9 - Full Costing

Question 1

What is full cost?

Answer 1

The total amount of resources sacrificed to achieve a given objective.

Question 2

What is a cost unit?

Answer 2

The product that is having its cost determined.

Question 3

What are four main areas in which information of full cost may prove useful for managers?

Answer 3

• Pricing and output decisions
• Exercising control - need for cost savings in some elements?
• Assessing relative efficiency - how/where to produce?
• Assessing performance - compare to sales revenue to see if profitable.

Question 4

In what two categories are costs separated, in full costing?

Answer 4

• Direct costs: can be traced to a particular product and can be measured reliably.
• Indirect costs (overheads): can not be directly identified to a particular product.

Question 5

How do we handle indirect costs in the job-costing approach?

Answer 5

They are allocated with the suitable amount to each product. The basis for allocation is subject to judgment but the nature of the costs should have an influence in the decision. Direct labor hours or direct machine hours are common bases. The total indirect cost will be the same no matter how we allocate it.

Question 6

What is a difference between profit calculated on the basis of variable costing compared to full costing?

Answer 6

Variable costing profit is only influenced by changes in sales, while full costing profit is influenced by changes in both sales and production

Question 7

What are the three steps to follow when allocating indirect costs?

Answer 7

1. What to allocate?
2. Allocation base?
3. Calculate allocation rate.