Lect 4 Flashcards
What is cost assignment methods for direct costs and indirect costs
- Direct cost = straight to go cost objectives
- Indirect cost = cost allocations
What is traditional costing systems?
- uses arbitrary allocation
What is marginal costing referred to?
What does absorption costing aim to establish?
What does absorption costing product cost look like (diagram)
- variable costing
- establish the full production costs
- the table looks like
- direct matierals
- direct labour
- variable production overheads
- fixed production costs
- full production costs
How do you use traditional absorption method
What if I can’t find the estimated fixed production cost?
- Calculate oar
- Overhead absorbed
Traditional calculate the oar + absorption - Calculating the oar:
ESTIMATED FIXED PRODUCTION / ESTIMATED ACTIVTY LEVEL
Estimated fixed production : is always given
-activity levels can be : units, machine hours, labour hours, direct materials costs and labour costs ( known as cost drivers)
Focusing on 1 cost driver:
1. To calculate activity levels : for e.g we look at direct labour of two companies. E.g basic and luxury. We look at how much labour is paid per hour. Then e.g basic spent £4 on labour then we do £5/4 we divide it by £5 because that how much they paid the workers. = 0.8 then do the same for the other companies or company. Luxury spent £5. 5/5 =1
Then we divide it by there budget output ( units) how much budget they had. Basic had 100,000. We do 100,000/ 0.8 =80,000 and then for luxury 1/100,000=10,000
- once we found that out we add it together 80,000+ 10,000=90,000 - is our activity level
360,000 ( fixed production costs ) / 90,000 ( estimated activity level ).
That is our OAR DONE!
To absorb it you:
-get direct labour number x it by the hour
Do same for all companies or the other company
- Divide direct labour by how much they get paid an hour
- Divide that number by there budget
- Add all the answer together ( that is your estimated activity level )
- Divide it by fixed cost that was already given.
- To absorb you times the direct labour number x hours they were paid and it should give per unit.
Second example with more than 1 company:
1. Allocate a cost driver: look at between labour and machine hours. See which one takes longer and has bigger numbers.
2. Calculate the oar = fixed production cost / machine hours x (all the 3 companies production sales/ budget ) then get that number ( how much each company was paid)
For e.g fixed production cost : 80,000
Company 1 machine hour: 0.01and budget was 500k
Company 2 machine hour: 0.04 and budget was 150k
Company 3 machine hour : 0.02 and budget was 250k
We do 80,000/ 0.01 x500 + 0.04x150 + 0.02 x 250 =5
Then do absoprtion for each company
Which is company 1 0.001 x 5 =0.05
Company 2 0.04 x 5=0.20
Company 3 = 0.02 x 5 = 0.10
If you can not find estaimted fixed production cost then that means it called : annual production overhead.
What is 2 advantage and disadvantage of traditional method?
- Simplicity And ias 2
Disadvantage
- repetitive and volume related
How do you do abc method? ( 4 steps )
- Group overheads into cost pools by activities
- Identify the cost drivers
- Calculate the oar for each cost pool
- Absorb it
- Firstly , the cost pools will always be given to you. ( set up costs, material and general)
- Then you look at the batches , labour hour and number of components. It should be given to you.
-set up costs: 100,000/ batch size then and then do it for other companies make sure you add all the companies prices together.
- materials 170,000/ Components and then do it for the other companies.
- general / machine hours : 90,000/labour hours and then do it for the other companies.
- for each cost pool you do make sure you add the comapnies numbers together at the end you should have
- total number of batches (40)
- total number of components (340,000) make sure you use the set up cost not matierals cost number and instead of dividing you have to TIMES IT!
- total number of labour hours. (90,000)
- Calculate the oar FOR EACH COST POOL
- set up cost pool e.g =100.000/40 =2,500 per batch
- material receiving and cash handling = 170,000/340,000=0.5 per compneont
- general /machine hours=90,000/90,000=1 - Then separate each company and work out their absorbs for each cost pool
E.g set up costs = basic company has batch 2,500 x number of batches they have you can work that out using set up cost / batch size and then divide it 100,000 ( only for this you divide it by its units
Matierals and receiving for company 1 = 0.5 x 3 components ( do not need to divide )
General /machine = 1 x 0.8 ( 1 labour hour)
Do the same for all the companies! And then you’re done.
What is advantage and disadvantage of using abc method?
Advantage
- it more accurate than traditional costs
Disadvantage
- time consuming and expensive.
