Lecture 5 - Cost Assignment - What Is Full Costing? Flashcards
What are the two types of cost systems?
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
What are the main purposes of ‘Full costing’?
- Budget planning and control
- Decision making
- Pricing
- Income measurement
What is meant by the term ‘Full Costing’ and how is it calculated?
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)
What are the 2 different approaches to ‘full costing’?
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
What is the issue associated with ‘Process costing’?
Cost error - Process costing may create errors because it does not directly assign costs to individual products.
Do manufacturing firms have more direct or indirect costs?
Direct costs
Irrespective of the costing system, non-manufacturing costs are treat as…
Period costs (I.e. expensed)
What type of cost-system is required in financial accounting?
Full costing (Direct and Indirect manufacturing)
Full costing is also known as…
Absorption costing
Under process costing, what is it unnecessary to do?
Assigns costs to individual units of production
Under ‘Job costing’, what can be defined as a job?
- 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)
‘Process costing’ can only be used for…
Identical or near identical units of output
‘Job Costing’ is more suited for firms that produce…
Multiple different products
How are ‘Direct costs’ and ‘indirect costs’ treat when using job costing?
Direct Costs = Traced to objects
Indirect Costs = Assigned to objects using cost allocation
What is meant by the term ‘Cost allocation’?
The process of absorbing overhead costs into products at the rate they have consumed overheads.
When calculating cost allocation, what are costs allocated to specifically?
Each individual unit of production
What is meant by ‘an appropriate allocation base’ (cost driver) and how is one identified?
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.
What are the two forms of ‘cost allocation’ for indirect costs?
1) Absorption Costing Systems
2) Activity based systems (ABC)
What is the general OverHead rate used in ‘Absorption costing’?
OH Rate = Total OH costs to be allocated/ Labour or Machine hours
If Direct Labour Hours are used for a basis for allocation this means that…
OH costs are consumed as much as direct labour hours are consumed
What is meant by the term ‘Blanket overhead rate’?
A single OH rate is applied throughout the business
What is the ‘Blanket-OH rate’ also known as?
The plant-wide OH rate
What are the three stages to calculating the Blanket Overhead Rate?
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
What does Full costing take into account?
Both Direct and Indirect costs
