Direct-And Absorption Costing Systems Flashcards
What are 2 cost accounting concepts / systems?
Absorption costing
Variable costing
What do the absorption and variable costing systems entail?
Both entail inventory valuation.
What is the difference between the 2?
Variable costing assimilates ONLY inventoriable variable costs and absorption assimilates BOTH
What is inventoriable costs?
Also called manufacturing costs: Costs incurred to turn inventory into a saleable product
What is non-inventoriable costs?
Also called non-manufacturing or period costs: Costs that are not capitalized to inventory but expressed as a period cost
Is variable costing for long or short term planning?
Short-term planning
What is absorption costing?
Accumulation and reporting of cost info within a format consistent with the accounting standards
Do the absorption costing system take into account manufacturing and non-manufacturing costs?
Manufacturing costs will be capitalized to inventory
Non-manufacturing cot will be expensed when incurred
What is fixed manufacturing overheads?
Fixed overheads incurred in converting materials into finished goods
Name examples of fixed manufacturing costs
Depreciation on factory machines
Electricity costs in the manufacturing plant
Salaries of manufacturing staff
Name examples of fixed non-manufacturing costs
Depreciation on the sales rep vehicle
Electricity in the admin building
Salaries of admin staff
What cost are used to determine the allocation rate?
BUDGETED fixed manufacturing overheads, as actual will only be known after a specific period.
NORMAL capacity is used to overcome problems of seasonality
How is the allocation of FMO (fixed manufacturing overheads) performed?
By taking budgeted fixed manufacturing costs and dividing it by normal capacity.
What is the allocation rate used for?
For allocating fixed manufacturing overheads to inventory.
What is an over/under allocation?
Difference between allocated FMO and actual manufacturing overheads
What does OVER-allocation mean?
The allocation of FMO is more than actual FMO incurred
What should happen with an over/under allocation?
Under-allocation is debited
over-allocation is credited
in the income statement to ensure ACTUAL manufacturing fixed costs are debited in the income statement.
What is variable costing also known as?
Direct costing or marginal costing .
What is the preferred format for management accounting?
The variable costing system for its short-term decision -making values.
If there are no opening AND closing inventory will the absorption & variable costing profit differ?
No, the profit will be the same if there are no opening AND closing inventory.
If units sold are more than produced will the profit differ?
This implies that there was opening inventories and a decrease in inventory.
Therefore the variable costing will show higher profit than absorption.
If production is more than units sold, will the profit differ?
This implies that there is closing inventories and a increase in inventory.
Therefore the absorption costing will show higher profit than variable .
How do we reconcile absorption to variable profit?
It is a reversal of the fixed manufacturing cost in opening and closing stock.
Arguments for absorption
It is the prescribed method used for financial reporting.
Is aware that fixed costs are real costs by absorbing overheads into value of inventory.
Profit figure is a function of both production and sales volume.
Useful as a performance measurement tool over long-term.
Arguments for variable costing
Info relevant for short-term decision-making.
Ensures all fixed costs which relate to a period are expensed in that period.
Profit figure is only a function of sales.
Preferred method for performance measurement purposes.
