knowledge test - absorption costing Flashcards
cost centres
parts of a business for which costs can be calculated. Cost centres may be departments, product lines, branches or regions
cost unit
individual item of output for which costs can be calculated. cost units may be goods or services
MARGINAL COSTING
the cost of producing one extra unit of output.
It is the sum of the variable costs of producing that extra unit (materials, direct labour and any other variable costs). It does not include the fixed costs of the business.
ABSORPTION COSTING
the total costs of the business are charged to cost units; indirect/fixed costs as well as direct/variable costs. Absorption costing may also be called ‘FULL COSTING’.
ALLOCATION
costs are entirely charged to a specific cost centre.
APPORTIONMENT
overheads are shared between relevant cost centres.
SERVICE DEPARTMENTS
cost centres that provide support for other cost centres within the same organisation, but not for the customers of that business.
ABSORPTION
overheads for a cost centre are shared between the units that it has produced.
OVERHEAD ABSORPTION RATE
Budgeted overheads for the cost centre ÷ Budgeted labour hours or machine hours in the cost centre
UNDER-ABSORPTION
the value of overheads absorbed by production costs is lower than the actual value of overheads.
OVER-ABSORPTION
the value of overheads absorbed by production costs is higher than the actual value of overheads.
benefits of marginal costing
It allows you to calculate the contribution per unit
It can be used for break-even calculations.
It can be used with decisions such as make or buy, acceptance of additional work and optimum production plans.
limitations of marginal costing
It does not ensure full cost recovery, as it does not include overheads.
The mark-up percentage for the selling price will be higher than using absorption costing.
It is not acceptable under International Accounting Standards for a valuation of inventory.
benefits of absorption costing
It ensures full cost recovery, as, unlike marginal costing, it does include overheads.
The mark-up percentage for the selling price will be lower than using marginal costing.
It is acceptable under International Accounting Standards for a valuation of inventory.
limitations of absorption costing
The ways used to apportion overheads between cost centres and/or from service departments may not be completely accurate
The OAR will be inaccurate if the estimated figures for overheads and the level of production are inaccurate.
The choice of labour hours or machine hour may not be relevant for all of the overheads.
Improvements in technology may lead to the use of labour hours not being a relevant basis for absorption costing.
It cannot be used for break-even analysis or business decisions that need the contribution per unit.
