l5 : full product cost Flashcards
define full cost.
total amount of resources, measured in monetary terms, sacrificed to achieve a particular objective
define full costing.
general approach for deducing the cost of a unit output. takes account of all costs.
why are full costs useful?
- gives per unit cost of a product or service
- monitoring & enhancing performance (info used to determine how profitable product is, can make decisions accordingly)
what is process costing?
used for identical, homogenous products. costs are accumulated in process then allocated over the units giving average cost of process.
why is process costing useful?
provides stock valuation / cost of sales for processes. eg. oil refineries, breweries, assembly lines
what is job costing?
used for one-off, non identical products. used in highly diversified firms. costs are accumulated for each job separately. allocation of overheads are included.
why is job costing useful?
allows calculation of profit & loss on any individual job. eg. building contracts, consultancy projects, motion pictures
how are full costs split?
direct & indirect costs
what are direct costs?
costs that can directly be traced to a specific output. can identify the value of this cost specifically to the cost object. eg. sandwich filling
what are indirect costs?
cost that need to be reasonably allocated to cost object
what are the two methods of allocating indirect costs?
- absorption costing (traditional)
- ABC (activity based costing)
what is absorption costing?
traditional method to allocate indirect costs. used to allocate overhead costs. looks at functional view of firm (who is consuming resources?)
what is the process of indirect cost allocation using absorption costing?
- service costs allocated to production dpts using service usage
- then allocated based on products using a measure of volume (tends to be labour based)
what are two criticisms of absorption costing?
- allocations are too simplistic / arbitrary
- not as relevant in modern tech (labour is less important now therefore less suitable as basis for allocation)
what is activity based costing?
views firm from an activity level to allocate overhead, indirect costs. uses systematic, cause & effect method of assigning cost of activities to products, services or cost objects. based on the principle that “products consume activities”.
what are the key steps in setting up ABC?
- define the activities (understand organisational processes)
- cost the activities (how much does it cost to perform an activity?)
- determine cost drivers (what causes costs to be incurred? break down production into various processes)
- calculate cost driver rate (gives cost of performing specific activity)
- apply cost driver rate to cost products or services (according to the usage / consumption of the cost driver)
what is the process of indirect cost allocation using ABC?
- service costs allocated to activity based cost pools
- then allocated to products on the basis of appropriate cost drivers firms moving from managing vertically to horizontally
why are more firms now using ABC?
- moving from managing vertically to horizontally
- move from function orientation to process orientation
give five features of ABC.
- reflects complexity of production
- avoids just averaging costs, like in trad FC allocations
- develops 2 stage allocation
- gives better product costs
- improved knowledge of cost incidence —> improves cost control
