Cost Allocation Flashcards
Indirect costs
Traced directly to the cost object
Indirect costs
Can’t be traced directly e.g. Manufacturing OH
Cost object
Anything for which a separate measurement is desired e.g. Product, service, customer
Capitalised cost
On SoFP
Expenses cost
On IS
Product cost
Total cost of producing goods
Period costs
Selling/admin costs
E.g. Advertising
Past costs
Costs that have been incurred (capitalised or expensed) in the past e.g. Historical/sunk costs
Irrelevant to decision of carrying out project
Future outlay costs
Future costs that will be incurred to achieve a particular objective
Opportunity cost
Value in monetary terms of the next best opportunity forgone for a particular transaction
Relevant to project decisions
Relevant costs
Future outlay + opportunity cost
Job costing
Charge overheads to different jobs according to cost allocation e.g. DL hours, DL costs
Direct allocation method
Service cost per unit x DL hours for each product dept
Step down
Service depts also provide service to other depts
ABC
Tries to prevent over/under costing different products that a business makes k
Since a business can make different products, specialised products might have higher costs and basic ones would cost less.
ABC allocates cost pools, grouping together indirect costs to diff cost objects
This way more costly items have a higher cost pool and can be incorporated into the cost object more accurately
Uses of ABC
Pricing : Gives insight into cost structure
Product mix decision : costs absorbed by more complex products are usually better reflected
Cost reduction and process improvement: focuses on support activity costs and factors the drive these
Design decisions: allow to evaluate more accurately coastlines soft new designs
Limitations of ABC
Liner cost assumption One cost pool per driver assumption Assume costs are seperable Miscasting can still occur e.g. When wrong cost driver is assigned Costly
Variable costing
All fixed costs excluded from inventoriable costs
Fixed costs charged directly to IS as period costs
Absorption (full) costing
All variable and fixed manufacturing costs and inventoriable costs
-downfall: encourages operational inefficiencies and stock build up
