Cost Assignment Flashcards
Cost Objective
An objective or activity relating to the organisation for which we require cost data (eg. Product, machine, department or activity)
Direct Cost
A cost that can be identified specifically with or traced to a given cost object.
Indirect Cost / Overhead
A cost that cannot be traced directly to a cost object (it is shared arbitrarily between two or more cost objectives)
A cost collection system normally accounts for costs in two broad stages…
Accumulates costs by classifying them into certain categories (eg. Labour, materials and overheads)
&
Assigns costs to cost objects.
Cost Allocations
The process of assigning costs to cost objects that involve the use of surrogate, rather than direct measures (surrogates known as allocation bases or cost drivers)
Cost Driver
A factor that affects costs in a significant way (eg. Volume)
Arbitrary Allocations
Allocation bases that are not significant determinants of the costs (eg. Dividing the cost by 2, rather doing a headcount). They result in inaccurate cost assignment. They are frequently used in Traditional Costing Systems.
What allocations are used by Activity Based Costing Systems?
Cause-and-effect allocations.
What makes up a Prime Cost?
Direct Materials + Direct Labour + Direct Expenses
What makes up a Production Cost?
Prime Cost + Production Overheads
Overhead Absorption
The assignment of overhead to units of output.
(Total Production Overhead / Number of Units Produced)
How to calculate the Overhead Absorption Rate?
(Total Production Overhead / Level of Cost Driver)
Things to consider when calculating the Overhead Absorption Rate
Are we using:
Departmental rate or Plant-wide/Blanket/Single rate
Annual rate or Seasonal rate
Predetermined rate or Actual rate
What cost driver should be used?
Blanket rate VS Departmental rate
A blanket rate can only be justified if all products consume departmental overheads in approximately the same proportions.
Whereas, if a diverse range of products are produced consuming departmental resources in different proportions, separate departmental (or cost centre) rates should be established.
Types of Volume used
Expected Annual Production Volume
Maximum Production Volume
Normal Production Volume
Expected Annual Production Volume
Accounting period is usually one year - the production volume used and fixed costs will relate to that year only.
Maximum Production Volume
Maximum that can be attained, giving consideration to uncontrollable machine breakdowns, delays in material delivery, and other factors.
Normal Production Volume
The average production volume that will satisfy average demand in a particular time-span. Fixed overheads can be recovered over a long period of time. The constant fixed cost per unit resulting from normal volume over 5 years, for example.
Pre-determined / Budgeted rates (for overhead allocation)
Estimated production overhead, based on predetermined overhead absorption rates.
Actual rates (for overhead absorption)
Means that the overhead absorption rate cannot be calculated until the end of the year - not practical, but accurate.
Under / Over Absorption of Overhead
Actual activity or expenditure on production overheads is different from expected activity or spending.
Under Absorption is an additional expense, which is written off immediately to the P&L as a debit.
Over Absorption is an unanticipated gain, which is credited to the P&L.
Cost Centre Overhead Rates
Where a department contains a number of different centres (each with significant overhead costs) and products consume overhead costs for each centre in different proportions, separate overhead rates should be established for each centre within a department.
