costing Flashcards
overhead absorption rate
equation
total overheads/ level of activity (in hours)
what did traditional costing involve?
- little diversification
- stable product ranges
- localised or non-competitive markets
- long product life-cycles
- labour and material costs predominant
- predictable business environment
- shift to more capital-intensive production
when would traditional costing be used
in single product firms such as oil companies or companies that have a highly standardised range of products
what are factors driving chnage from overhead costing to ABC
- capital intensive and machine based production
- high level of overheads relative to direct cost
- highly competitive international market
- short product life cycle
why does traditional costing not work
car example
if a company produces 90% standard cars and 10% non-standard and assinged oevrhead of 90 and 10 to them then they would not be even. This would be due to increased labour or parts on the non-standard vehicle. Therefore, the actual overhead would be 60% and 40%.
What are some problem indicators that your overheads are too high?
- line managers question them
- sales are up but profits are down
- competitors high-volume products are priced at level that seem unrealisitcally low
What is Activity Based Costing
ABC
costs not driven by volume but by the complexity of production activities
short-term variable costs
direct, e.g material or productivity based wages. varies with volume of input and output
long-term variable costs
many overheads vary in line with activity- not directly relates to volume
long-term variable cost examples
- setting up production line, “first-item” inspection, buying materials and components, deliery inspections, transder from stock
What is the most common activity associated with ABC
batch related- each time batch of goods is produced
step 1 of ABC
identify activity
step 2 of ABC
identify cost pool
step 3 of ABC
identifiy the activities cost driver
step 4 of ABC
calculate the cost driver rate
