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MI > Costing and Pricing > Flashcards

Costing and Pricing Flashcards

1
Q

What is a cost object?

A

Anything for which costs can be measured.

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2
Q

What is a cost unit?

A

The basic measure of a product or service in relation to which costs are determined.

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3
Q

What are composite cost units?

A

Cost units made up of two elements - used when a single measure would be inappropriate for control purposes. E.g., measuring freight cost in tonnes/km

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4
Q

What is cost classification?

A

The arrangement of cost items into logical groups, e.g. by their function or nature.

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5
Q

What is a direct cost?

A

One which can be traced in full to the product, service or department that is being costed.

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6
Q

What is the prime cost?

A

Total direct costs

direct labour + raw materials + direct expenses (e.g. royalties)

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7
Q

What are indirect production costs?

A

Costs that are incurred in the course of making a product/service which cannot be identified with a particular cost unit.

Production overheads.

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8
Q

What are the main reasons that businesses need to be able to ascertain the cost of making their product/service?

A
  1. Profitability analysis
  2. Selling price determination
  3. Inventory valuation purposes
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9
Q

What is a fixed cost?

A

A cost that, within a relevant range of activity levels, is NOT affected by increases or decreases in the level of activity.

They are a period cost.

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10
Q

What is a variable cost?

A

A cost that increases or decreases as the level of activity increases or decreases.

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11
Q

Does the variable cost per unit change?

A

No. It is the same for each unit produced.

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12
Q

What is a semi-variable cost?

A

Costs that are part fixed and part variable. They are partly affected by changes in the level of activity.

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13
Q

As more units are produced, what happens to the fixed cost per unit?

A

It decreases.

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14
Q

What is the relevant range?

A

The range of activity levels within which assumed cost behaviour patterns occur.

Broadly represents the activity levels at which an organisation has had experience of operating in the past and for which cost information is available.

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15
Q

What is responsibility accounting?

A

A system of accounting that segregates revenue and costs into areas of personal responsibility in order to monitor and assess the performance of each part of an organisation.

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16
Q

What is a responsibility centre?

A

A department or function whose performance is the direct responsibility of a specific manager.

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17
Q

What is a controllable cost?

A

A cost which can be influenced by management decisions and actions.

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18
Q

What is an uncontrollable cost?

A

A cost that cannot be affected by management within a given time span.

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19
Q

What are some examples of non-controllable costs?

A

Increased expenditure due to inflation or legislation.

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20
Q

Are most variable costs within a department thought to be controllable or uncontrollable in the short term?

A

Controllable.

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21
Q

What are the advantages of the FIFO method?

A
  • Logical that the oldest inventory is likely to be used first
  • Easy to understand
  • Inventory valuation is close to current replacement cost
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22
Q

What are the disadvantages of the FIFO method?

A
  • Cumbersome; each purchase needs to be recorded separately
  • Comparison of costs and decision-making are complicated if prices are fluctuating
  • In times of HIGH inflation the cost of inventory issues will LAG behind current market value
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23
Q

What are the advantages of the LIFO method?

A
  • Inventory issued at a price close to the current market value
  • Managers are more aware of up-to-date costs
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24
Q

What are the disadvantages of the LIFO method?

A
  • Cumbersome to manage as purchases need to be kept separate in the accounting records
  • Not usual that the newest items are issued to not reflective of what is actually happening.
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25
Q

What are the advantages of cumulative weighted average pricing?

A
  • Fluctuations in price are smoothed out, makes decision-making easier
  • Easier to administer than FIFO or LIFO
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26
Q

What are the disadvantages of cumulative weighted average pricing?

A

Resulting value of inventory issues rarely the same as what items actually cost

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27
Q

What is periodic weighted average pricing?

A

A single average is calculated at the end of the period based on all purchases for the period.

(Cost of opening inventory + total cost of receipts in period) / (Units in opening inventory + total units received in period)

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28
Q

What is absorption costing?

A

The method by which a share of total production overheads is added to the prime cost, in order to calculate the full production cost of a product/service per unit.

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29
Q

What is the OAR?

A

The overhead absorption rate per unit

= Production overhead / Activity level

30
Q

What are the three steps to absorption costing?

A

Step 1: Allocate and apportion production overheads to cost centres.
Step 2: Reapportion overheads in service cost centres to production cost centres.
Step 3: Absorb overheads into cost units.

31
Q

How are service cost centre overheads reapportioned to production cost centres?

A

Using the step down method:
the service department that serves most other service centres should be apportioned first, and then step down to the service centre that provides the second more, etc.

32
Q

How would one choose the activity to use to calculate the OAR?

A

Ideally, use the activity which most accurately reflects the way in which the overheads are being incurred.

33
Q

Why would a company use a predetermined OAR?

A
  • Many actual overheads are not known until year end
  • Overheads vary during the year
  • Activity level varies during the year
34
Q

How would you calculate a predetermined OAR?

A

Budgeted overhead / budgeted activity level

35
Q

How would you calculated the overhead absorbed?

A

Actual activity x Predetermined OAR

36
Q

How would you reconcile an under or overabsorption of costs at the end of the accounting period?

A

By an adjustment on the P+L:

  • Underabsorption - debit (expense)
  • Overabsorption - credt (income)
37
Q

What is a blanket absorption rate?

A

An absorption rate used throughout a factory for all units irrespective of the department in which they were produced.

AKA single factory overhead absorption rate.

38
Q

What is a disadvantage of traditional absorption costing?

A

Production overheads are not all volume related and hence a single basis for absorption would not adequately reflect the complexity of producing certain products/costs as opposed to others.

39
Q

When using traditional absorption costing, what tends to happen with low-volume products?

A

Tends to result in under-allocation of overheads to low-volume products.

40
Q

What is activity-based costing (ABC)?

A

Each type of overhead is absorbed using a DIFFERENT basis depending on the cost driver.

41
Q

What are the steps involved in calculating product costs using ABC?

A

Step 1: Group overheads into activities according to how they are driven - into COST POOLS.
Step 2: Identify the cost drivers for each activity.
Step 3: Calculate a cost per unit of cost driver.
Step 4: Absorb activity costs into production based on USAGE of cost drivers.

42
Q

When is job costing appropriate?

A

When each separately identifiable cost unit or job is of a relatively short duration.

43
Q

When is batch costing appropriate?

A

When each separately identifiable cost unit would be a batch of identical items.

44
Q

What is the cost per unit in a batch measured as?

A

The total batch cost divided by the number of units in the batch.

45
Q

When is contract costing appropriate?

A

When each separately identifiable cost unit is of relatively long duration.

46
Q

How is the cost per unit of output from each process determined in process costing?

A

By dividing the total process cost by the number of units produced in each period.

47
Q

How would the cost of a completed unit be calculated using process costing?

A

The costs are accumulated throughout each process - the output of one process becomes the input of the subsequent process and so on.

48
Q

What is life cycle costing?

A

Costing which tracks and accumulates actual costs and revenues attributable to each product over its entire life cycle, from R&D, through production and sales, to post-production costs e.g. decommisioning.

49
Q

What is target costing?

A

Target costing begins with a concept for a new product, determines a required selling price and deducts a desired profit margin to result in the target cost (the acceptable cost).

50
Q

Why is initial design of the product so important to target costing?

A

Many of the costs to be incurred over the product’s entire life cycle are built into the product at the design stage.

51
Q

Are JIT systems ‘push’ or ‘pull’ systems?

A

Pull

52
Q

What factors are important to a JIT system?

A

They need to be very efficient:

  • Reliable suppliers
  • Good quality raw material
  • Short lead times
  • Good forecasting of future production requirements.
53
Q

In which areas might an efficient JIT system enable managers to control and reduce costs?

A
  • Warehousing costs
  • Improved capacity utilisation
  • Reduction in waste
  • Reduction in write-offs due to obsolescence
54
Q

What is marginal costing?

A

It considers ONLY the variable cost of a product or service - that which would be avoided if a unit of a was not produced or provided.

55
Q

What is contribution?

A

Contribution towards fixed costs and profit. The difference between selling price and all variable costs (including non-production variable costs), usually expressed on a per unit basis.

Contribution per unit = sales price - variable costs per unit

56
Q

How can profits generated using absorption costing and marginal costing be reconciled?

A

Difference in marginal and absorption costing profit = Change in stock in units X OAR per unit

57
Q

What are the advantages of absorption costing?

A
  • Recognises that selling price must cover all costs

- Complies with IAS 2 Inventories

58
Q

What are the advantages of marginal costing?

A
  • Highlights contribution so appropriate for decision making
  • Fixed costs treated in accordance with their nature
  • Profit depends on sales and efficiency, not production levels
59
Q

What are the drawbacks of absorption costing?

A
  • Profits can be manipulated by changing production levels

- Based on the assumption that overheads are volume related

60
Q

What are the drawbacks of marginal costing?

A
  • Danger that contribution fails to cover fixed costs
  • Does not comply with IAS 2
  • Necessitates analysis of mixed costs between fixed and variable
61
Q

What is a mark-up?

A

The amount added by a seller to the cost of a commodity to cover expenses and profit in fixing the selling price.

Profit is expressed as a percentage of cost.

62
Q

What is a margin?

A

The difference between a product’s (or service’s) selling price and the cost of production, expressed as a percentage of the sales price.

63
Q

How would a full cost-plus price be calculated?

A

Unit sales price = Total production cost per unit (+ other costs) +
percentage mark-up

64
Q

What are the advantages of full cost-plus pricing?

A
  • Quick and easy
  • Decisions can be delegated
  • Covers costs if at normal capacity
  • Can justify price rises
65
Q

What are the disadvantages of full cost-plus pricing?

A
  • Will not maximise profit (may sell less than optimum due to passing on costs to customers)
  • Less incentive to control costs
  • Arbitrary absorption of overheads required
66
Q

When would marginal cost-plus pricing be used in practice?

A

In businesses where there is a readily identifiable basic variable cost.

67
Q

What is marginal cost-plus pricing?

A

A method of determining sales prices whereby a profit mark-up is added to either the marginal cost of production or the marginal cost of sales.

68
Q

What are the advantages of marginal cost-plus pricing?

A
  • Simple
  • No arbitrary apportionment and absorption of overheads required
  • More useful for short-run decision making (e.g. pricing for a one-off order)
69
Q

What are the disadvantages of marginal cost-plus pricing?

A
  • Not profit maximising

- Full costs may not be recovered in the long term

70
Q

How do you deal with sales tax when calculating discounts?

A

Sales tax must be removed BEFORE calculating the discount.

Once the discounted net sales price has been calculated, the sales tax can then be added back.

MI (5 decks)

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