Full Cost Techniques Flashcards
What is the definition of absorption costing?
A way of finding an appropriate amount of overhead per cost unit so that total cost of producing a product or job can be calculated.
What are the 4 advantages of Absorption costing?
- Complies with IAS2- includes production overheads.
- Fixed costs must be covered in the long run.
- Production cannot be divorced from fixed costs.
- Recognizes that selling price must cover all costs
What are the 4 Disadvantages of Absorption Costing?
- Unit cost includes costs which are not relevant for marginal decision making.
- Nature of cost is obscured
- Profit can be manipulated by changing production levels, because fixed overheads will be carried forward as it is included in closing inventory.
What is the definition of Activity Based Costing? (ABC)
Using cost drivers to assign activity costs to units.
What are the 4 ways ABC costing differs from traditional costing?
- Production overheads are high in relation to fixed costs
- Overhead resource consumption is not driven solely by Production volume
- Wide variety in product range
- Overhead resource input varies significantly across product range.
What are the 4 steps to calculate product costs using ABC?
- Identify major activities
- Identify cost drivers which cause costs of activities.
- Collect costs associated with each activity into cost pools(ABC cost centres).
- Charge costs of activities to products on basis of usage of activities.
What are the 4 cost drivers?
- Volume-related cost driver
- Transaction driver
- Duration drivers
- Intensity drivers
What are the 5 benefits of ABC?
- Cost control and reduction by efficient management of cost drivers.
- Better costing information
- Realistic estimate of costs and profits
- Product mix decisions
- Profitability analysis
What are the 5 criticisms of ABC?
- Time consuming and expensive
- Limited benefit if overhead costs are primarily volume related.
- Reduced benefit if company is producing only one product or similar products.
- Complex situations may have multiple cost drivers
- Arbitrary apportionment may still exist
What is meant by apportionment?
Overheads which cannot be allocated to one cost centre must be shared, on a fair basis, among the cost centres that jointly incurred the cost.
What are the four steps to calculate the overhead cost per unit?
- Allocation - total overheads are charged to the relevant cost centre in full’
- Apportionment - Overheads are shared across each cost centre using a fair basis
- Reapportionment - All service cost centre overheads are shared out between the production cost centres
- Absorption - Production cost centre overheads are ábsorbed’ into cost units using a suitable basis
What is meant by Reapportionment?
This is the apportionment of service and cost centres’ costs to the production cost centres that use their service.
What is overhead absorption?
Overhead absorption is the way that overheads are charged to output. Once all the production overhead costs have been apportioned to the production cost centres, we need to charge these to the cost units passing through production cost centres.
What is the Overhead Absorption Rate (OAR)?
The rate at which overheads are charged to cost units calculated by dividing budgeted overheads by the the budgeted level of activity.
What is meant by over-absorption?
Occurs if more overheads are absorbed than have actually been incurred.
