Lecture 2 Flashcards
What is the equation for Total product cost?
Total product cost = Prime cost + Production overhead cost.
Average Cost Method (AVCO) equation?
Average Cost Method (AVCO) equation: AVCO = Total amount paid/Units received x units issued for production
Define allocate?
Allocate means to assign a whole item of cost, or of revenue, to a single cost unit, centre, account or time period.
Define Apportion?
Apportion means to spread costs over two or more cost units, centres, accounts or time periods. (It is referred to by some books as ‘indirect allocation’.)
Define absorb?
Absorb means to attach overhead costs to products or services.
Explain the five steps of Allocation, Apportionment and Absorption in Costing?
This process can be explained in the following steps:
Direct materials are allocated to products
Direct labour costs are allocated to products
Indirect material costs and indirect labour costs are:
allocated and apportioned to cost centres (many firms have two main types of cost centre – production cost and service cost centres)
Total indirect costs of service cost centres are:
apportioned over production cost centres
Total overhead costs of production cost centres are
absorbed into products
When a question says “using labour hours as allocation basis” what do you know you need to do?
when a question says “using labour hours as allocation basis” what do you know you need to use a blanket rate