Lecture 5 - Cost Assignment - What Is Full Costing?

Question 1

What are the two types of cost systems?

Answer 1

Direct costing systems

• Only direct manufacturing costs are assigned to cost objects.
• Indirect costs are not allocated and are considered period costs.

Full Costing systems
- Assigns both direct and indirect manufacturing costs

Question 2

What are the main purposes of ‘Full costing’?

Answer 2

• Budget planning and control
• Decision making
• Pricing
• Income measurement

Question 3

What is meant by the term ‘Full Costing’ and how is it calculated?

Answer 3

Full costing deduces the cost of output by taking into account all the manufacturing costs involved in the production of said output.

(Direct + Indirect manufacturing costs) + (Fixed costs + Variable Costs)

Question 4

What are the 2 different approaches to ‘full costing’?

Answer 4

Process costing

• Used when masses of identical units are produced.
• It is unnecessary to assign costs to individual units of output. Instead TC/Units of output will give the correct cost.

Job costing

• When a unit or batch of output of a product are produced
• To be accurate, the cost of each unit or batch needs to be calculated

Question 5

What is the issue associated with ‘Process costing’?

Answer 5

Cost error - Process costing may create errors because it does not directly assign costs to individual products.

Question 6

Do manufacturing firms have more direct or indirect costs?

Answer 6

Direct costs

Question 7

Irrespective of the costing system, non-manufacturing costs are treat as…

Answer 7

Period costs (I.e. expensed)

Question 8

What type of cost-system is required in financial accounting?

Answer 8

Full costing (Direct and Indirect manufacturing)

Question 9

Full costing is also known as…

Answer 9

Absorption costing

Question 10

Under process costing, what is it unnecessary to do?

Answer 10

Assigns costs to individual units of production

Question 11

Under ‘Job costing’, what can be defined as a job?

Answer 11

• A specific product for one customer.
• A single unit of product
• A batch of units of the same type (produced in the same manufacturing run)

Question 12

‘Process costing’ can only be used for…

Answer 12

Identical or near identical units of output

Question 13

‘Job Costing’ is more suited for firms that produce…

Answer 13

Multiple different products

Question 14

How are ‘Direct costs’ and ‘indirect costs’ treat when using job costing?

Answer 14

Direct Costs = Traced to objects

Indirect Costs = Assigned to objects using cost allocation

Question 15

What is meant by the term ‘Cost allocation’?

Answer 15

The process of absorbing overhead costs into products at the rate they have consumed overheads.

Question 16

When calculating cost allocation, what are costs allocated to specifically?

Answer 16

Each individual unit of production

Question 17

What is meant by ‘an appropriate allocation base’ (cost driver) and how is one identified?

Answer 17

A cost driver affects the cost of a specific business activity.

For example:
In a manufacturing firm, a suitable cost driver is the number of machine hours worked.

A cost driver is identified by thinking about the ‘Cause +effect’ relationship.
For example:
A cost object will consume power as much as machine hours are consumed.

Question 18

What are the two forms of ‘cost allocation’ for indirect costs?

Answer 18

1) Absorption Costing Systems

2) Activity based systems (ABC)

Question 19

What is the general OverHead rate used in ‘Absorption costing’?

Answer 19

OH Rate = Total OH costs to be allocated/ Labour or Machine hours

Question 20

If Direct Labour Hours are used for a basis for allocation this means that…

Answer 20

OH costs are consumed as much as direct labour hours are consumed

Question 21

What is meant by the term ‘Blanket overhead rate’?

Answer 21

A single OH rate is applied throughout the business

Question 22

What is the ‘Blanket-OH rate’ also known as?

Answer 22

The plant-wide OH rate

Question 23

What are the three stages to calculating the Blanket Overhead Rate?

Answer 23

Step 1: Calculate the Overhead rate.
Step 2: Calculate the Overhead amount for each product based upon the cost driver per product.
Step 3: Sum Direct and Indirect costs to arrive at the FULL COST

Question 24

What does Full costing take into account?

Answer 24

Both Direct and Indirect costs