Full Costing Flashcards
What is full costing
The total of direct and indirect costs
The logic of full costing is that the entire cost of running a facility, such as an office or factory, must be regarded as part of the cost of the output that it helps to generate.
Why do managers want to know the full cost
Pricing and output decisions (having full cost fino helps managers make decisions on the price to charge and can also be used to determine the number of units of products/services to be produced)
Exercising control (if full cost too high - individual elements of full cost may be examined)
Assessing relative efficiency (full cost can help compare the cost of carrying out an activity in a particular way with the cost if it was carried out a different way)
Assessing performance (measure profit and revenue a product generates and compared that to the cost incurred in generating that revenue)
How to calculate single product business (Process Costing)
The production process will involve a series of continuous or repetitive activities and the output will consist of near identical items.
Add up all of the elements of the cost of production incurred in a particular period (materials, labour, rent, fuel, power and so on) and divide this total by the total number of units of output for that period.
What are the problems with full costing
Although indirect cost must form part of the full cost of each cost unit, it cannot often be identified directly with particular cost units.
This raises a major practical issue: how can indirect cost (overheads)be assigned to individual cost units?
Indirect costs (overheads) are often viewed as providing a service to cost units
Overhead absorption (recovery rate) OAR formula
Total indirect cost/basis for absorbtion
why are direct labour hours mostly used s a basis for absorption of overheads
Size of job - large jobs attract more overheads because they are likely to have been given more service by the overheads than small jobs
Overheads are mostly related to time (rent, heating lighting, salaries)
Easily measured (direct labour hours will normally be measured to deduce the direct labour element of cost – so a direct labour hour basis of dealing with overheads is practical to apply)
Explain batch costing
Many types of goods and some services are produced in a batch of identical units of output - each batch produced is distinctly different from other batches.
The full cost of the batch derived on a job costing basis/ no.of units in batch
= full cost on one cost unit
