comparison of marginal, absorption and activity based costing Flashcards
1
Q
what are the main uses of marginal costing ?
A
- to help with short-term decision-making such as make or buy decisions, acceptance of additional work, price setting, target profit, ect.
2
Q
how does marginal costing work ?
A
- focuses on product costs
- costs are classified as either fixed or variable
- contribution to fixed costs is calculated as selling price less variable costs
3
Q
main focus of marginal costing ?
A
- marginal cost
- contribution
4
Q
benefits of marginal costing :
A
- concept of contribution is easy to understand
- useful for short-term decision-making, but no consideration of overheads
5
Q
limitations of marginal costing :
A
- costs have to be identified as either fixed or variable
- all overheads have to be recovered, otherwise a loss will be made
- not acceptable under IAS 2, inventories
- calculation of selling prices may be less accurate than other costing methods
6
Q
what are the main uses of absorption costing ?
A
- to calculate selling prices using cost plus profit
- to calculate inventory valuation for financial statements
7
Q
how does absorption costing work ?
A
- focuses on product and period costs
- production overheads are charged to production through an overhead absorption rate, often on the basis of direct labour hours or machine hours
8
Q
main focuses of absorption costing ?
A
- production overheads charged to production
- calculating selling prices and profit
- calculating inventory values
9
Q
benefits of absorption costing :
A
- acceptable under IAS 2, inventories
- appropriate for traditional industries where production overheads are charged to production on the basis of direct labour hours or machine hours
10
Q
limitations of absorption costing :
A
- not as useful in short-term decision-making as marginal costing
- may provide less accurate basis for calculation of selling prices where overheads are high and complex in nature
11
Q
what are the main uses of activity based costing ?
A
- to identify what causes overheads to be incurred to a particular activity
12
Q
how does activity based costing work ?
A
- focuses on product costs
- cost drivers are identified
- production overheads are attributed to production on the basis of activities
13
Q
main focuses of activity based costing ?
A
- identifying cost drivers as a way of attributing production overheads to production
14
Q
benefits of activity based costing :
A
- acceptable under IAS 2, inventories
- more accurate calculation of selling prices because production overheads are analysed to the products which use the activities
- appropriate for capital-intensive industries where overheads are high and complex in nature
15
Q
limitations of activity based costing :
A
- time-consuming to set up and record costs (because of the detail required)
- the selection of cost drivers can be difficult
- the cost drivers and cost pools need to be kept up-to-date
- period costs - such as rent and rates - still need to be recovered
