Direct-And Absorption Costing Systems

Question 1

What are 2 cost accounting concepts / systems?

Answer 1

Absorption costing

Variable costing

Question 2

What do the absorption and variable costing systems entail?

Answer 2

Both entail inventory valuation.

Question 3

What is the difference between the 2?

Answer 3

Variable costing assimilates ONLY inventoriable variable costs and absorption assimilates BOTH

Question 4

What is inventoriable costs?

Answer 4

Also called manufacturing costs: Costs incurred to turn inventory into a saleable product

Question 5

What is non-inventoriable costs?

Answer 5

Also called non-manufacturing or period costs: Costs that are not capitalized to inventory but expressed as a period cost

Question 6

Is variable costing for long or short term planning?

Answer 6

Short-term planning

Question 7

What is absorption costing?

Answer 7

Accumulation and reporting of cost info within a format consistent with the accounting standards

Question 8

Do the absorption costing system take into account manufacturing and non-manufacturing costs?

Answer 8

Manufacturing costs will be capitalized to inventory

Non-manufacturing cot will be expensed when incurred

Question 9

What is fixed manufacturing overheads?

Answer 9

Fixed overheads incurred in converting materials into finished goods

Question 10

Name examples of fixed manufacturing costs

Answer 10

Depreciation on factory machines
Electricity costs in the manufacturing plant
Salaries of manufacturing staff

Question 11

Name examples of fixed non-manufacturing costs

Answer 11

Depreciation on the sales rep vehicle
Electricity in the admin building
Salaries of admin staff

Question 12

What cost are used to determine the allocation rate?

Answer 12

BUDGETED fixed manufacturing overheads, as actual will only be known after a specific period.
NORMAL capacity is used to overcome problems of seasonality

Question 13

How is the allocation of FMO (fixed manufacturing overheads) performed?

Answer 13

By taking budgeted fixed manufacturing costs and dividing it by normal capacity.

Question 14

What is the allocation rate used for?

Answer 14

For allocating fixed manufacturing overheads to inventory.

Question 15

What is an over/under allocation?

Answer 15

Difference between allocated FMO and actual manufacturing overheads

Question 16

What does OVER-allocation mean?

Answer 16

The allocation of FMO is more than actual FMO incurred

Question 17

What should happen with an over/under allocation?

Answer 17

Under-allocation is debited
over-allocation is credited
in the income statement to ensure ACTUAL manufacturing fixed costs are debited in the income statement.

Question 18

What is variable costing also known as?

Answer 18

Direct costing or marginal costing .

Question 19

What is the preferred format for management accounting?

Answer 19

The variable costing system for its short-term decision -making values.

Question 20

If there are no opening AND closing inventory will the absorption & variable costing profit differ?

Answer 20

No, the profit will be the same if there are no opening AND closing inventory.

Question 21

If units sold are more than produced will the profit differ?

Answer 21

This implies that there was opening inventories and a decrease in inventory.
Therefore the variable costing will show higher profit than absorption.

Question 22

If production is more than units sold, will the profit differ?

Answer 22

This implies that there is closing inventories and a increase in inventory.
Therefore the absorption costing will show higher profit than variable .

Question 23

How do we reconcile absorption to variable profit?

Answer 23

It is a reversal of the fixed manufacturing cost in opening and closing stock.

Question 24

Arguments for absorption

Answer 24

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.

Question 25

Arguments for variable costing

Answer 25

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.