Costing and Pricing Flashcards

1
Q

What is the difference between the purpose of financial accounting and the purpose of management accounting?

A

The purpose;
Financial accounts: Prepared for external stakeholders
Management accounts: Prepared for internal managers

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2
Q

What is a cost object?

A

Anything for which costs can be measured

An object that has a cost - how much does X cost?

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3
Q

What is a cost unit?

A

The measure by which costs are determined

How an organisation’s output is measured

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4
Q

What is the difference between a function and a department?

A

Functions are divisions within a business (e.g Audit)

Departments are divisions within a function (e.g CLR)

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5
Q

What is a composite cost unit?

A

A two part cost unit - where there are two elements by which the cost is measured

E.g cost per tonne per kilometre travelled

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6
Q

What is a direct cost?

A

A cost that can be allocated, in full, to the item being costed

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7
Q

What is prime cost?

A

The total direct cost = direct labour cpst + direct materal cost + direct expenses

Above are the three types of direct cost

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8
Q

What are indirect production costs?

A

Costs that cannot be fully allocated to the unit being costed

Overheads - a pool of costs that need to be allocated

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9
Q

What is a period cost?

A

Costs within a period of time

Usually deducted as an expense within the period

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10
Q

What is a product cost?

A

The cost of a finished product

Cost of goods sold

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11
Q

What is responsibility accounting?

A

Where revenue and costs are segregated into areas of personal responsibility and are used to assess performance

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12
Q

What is a responsibility centre?

A

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

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13
Q

What are the 3 methods of inventory valuation?

A
  1. FIFO
  2. LIFO
  3. Average Cost
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14
Q

What are the advantages and disadvantages of the FIFO method of inventory valuation?

A

Advantages:
* Logically represents what is likely to physically happen - as oldest inventory is likely to be used first
* Easy to understand

Disadvantages:
* Long winded calculations
* Assumes one price for a purchase of materials when there may be varying prices
* During periods of inflation, issue prices will lag behind market value

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15
Q

What are the advantages and disadvantages of the LIFO method of inventory valuation?

A

Advantages:
* Inventories issued at a price close to market value - keeps up with inflation
* Managers aware of current costs when making decisions

Disadvantages:
* Long winded calculations
* Often the opposite of what is actually happening - newest stock is rarely first out
* Assumes one price for a purchase of materials when there may be varying prices

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16
Q

What are the advantages and disadvantages of the average pricing method of inventory valuation?

A

Advantages:
* Price fluctuations are smoothed out
* No need to identify each batch separatley

Disadvantages:
* Issue price rarely matches an actual price paid
* Prices lag behind market values when there is gradual inflation

17
Q

When is a new inventory value per unit calculated within the cumulative average cost method?

A

Whenever there is a new reciept/purchase of materials

Not sale

18
Q

When is a new inventory value per unit calculated within the periodic average cost method?

A

At the end of the period, based on all purchases for the period

Periodic WA = Total cost of Purchases in period / Total number of purchases in period

19
Q

What is the absorbtion cost?

A

The direct (or prime) cost of an item plus a share of the indirect costs

Absorbtion costing is the method by which overheads are allocated

20
Q

How do you calculate the Predetermined OAR?

OAR: Overhead Absorbtion Rate

Key Formula

A

Predetermined OAR = Budgerted production overheads ÷ Budgeted activity level

21
Q
  1. What does over absorbtion mean?
  2. What does under absorbtion mean?
A
  1. Over absorbtion means that the overheads charged to costs of production are higher than the overheads actually incurred
  2. Under absorbtion means that insufficient overheads have been included in the cost of production
22
Q

What are some justifiable reasons for an under/over absorbtion of overheads?

A
  • Actual overhead costs are different from budgeted overheads
  • The actual activity level is different from the budgeted activity level
23
Q

What is contribution

How is this different to Marginal Cost

A

Contribution per unit = Sales price less marginal cost

  • Fixed costs are not included in working out contribution
  • Contribution takes account of all marginal costs
  • Marginal costing takes account of variable production costs only

E.g Contribution considers variable selling costs but marginal cost does not as this is not a cost of production

Profit = sales price - marginal costs - fixed price for period

Marginal costs are only the variable costs

24
Q

How do you calculate the difference between the marginal and absorbtion costing profit?

A

Change in stock x OAR per unit

SIAM
Stock
Increases
Absorbtion costing profit is
More than marginal

25
Q
  1. If a sales price is determined prior to the delivery of goods or services, who bears the risk of inflation?

a) The buyer
b) The seller

  1. If the buyer agrees to prices based on actual costs incurred, who bears the risk of inflation?

c) The buyer
d) The seller

A
  1. b
  2. c