Direct & Absorption Costing Flashcards

1
Q

Absorption costing

A

System used in valuing inventory

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2
Q

Formula of Absorption costing

A

Cost of Materials & Labour + Variable & Fixed MOH

Gross Profit Calc. format

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3
Q

Components of Absorption costing

A
  • Direct material
  • Direct labour
  • Fixed & Variable MOH

FC part of Inventory via Allocated Budgeted Fixed MOH rate

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4
Q

Advantages of Absorption costing

A
  • Takes all costs of production into account
  • Takes DM & DL as well as IM & IL into account
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5
Q

Disadvantages of Absorption costing

A
  • Not useful for the product decision making
  • Provides a poor valuation of the actual cost of manufacturing a product
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6
Q

Direct/Variable costing

A

Costing method that ONLY includes DM, DL & Variable MOH in Production Cost

Contribution Calc. format

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7
Q

Components of Direct costing

A
  • Direct material
  • Direct labour
  • Variable MOH

FC expensed in Total

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8
Q

Advantages of Direct costing

A
  • Provides a better understanding of the effect of Fixed Cost on net profits
  • Total Fixed Cost is shown on the Income Statement
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9
Q

Disadvantages of Direct costing

A
  • Doesn’t assign FC to units of product
  • Production costs can’t be truly matched with revenues
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10
Q

Variable & Fixed selling and admin cost

A
  • Under absoprtion costing leads to period costs that don’t go into cost of product
  • EXPENSED in period occurred
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11
Q

Absorption Costing in short

A
  • Is the Gross Profit Calc format
  • FC forms part of Inventory via Allocated Fixed MOH rate
  • FC included in the Opening- & Closing balance on a per unit basis
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12
Q

Direct Costing in short

A
  • Uses Contribution Calc format
  • Fixed Costs are expensed in the Total
  • Move Indirect Variable Costs “up” into the top section as part of contribution approach
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13
Q

Costs of Variable Costing

A

VC directly incurred in the production

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14
Q

Costs of Absorption Costing

A

Both Variable Costs & Fixed Costs are related to the production

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15
Q

Internal/External use of Variable Costing

A

Used for internal reporting purposes

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16
Q

Internal/External use of Absorption Costing

A

Used for reporting to external stakeholders as well as for the purpose of filing taxes

17
Q

Relevance of Variable Costing

A

Used for comparing the profitability of different product lines

18
Q

Relevance of Absorption Costing

A

Used for Calculation of per unit based on all the costs (including Fixed OH)

19
Q

Reporting of Variable Costing

A

Based on internal specifications of reporting & presentation

20
Q

Reporting of Absorption Costing

A

Based on external reporting standards given by external agencies

21
Q

Inventory of Variable Costing

A

ONLY Variable Costs of production to be assigned to Inventory, WIP & CoGS

22
Q

Inventory of Absorption Costing

A

Considering ALL PC and including them in Inventory & WIP

23
Q

Contribution of Variable Costing

A

Sales - VC

24
Q

Contribution of Absorption Costing

A

Calc. Net Profit

25
Q

Profit of Variable Costing

A

Easier to predict (function of sales)

26
Q

Profit of Absorption Costing

A

Is more difficult to predict the effect of changes in sales of profit