Lecture 8a Flashcards
What are fixed costs?
Remain the same dont change regardless of the no of units produced e.g rent and rates
What are variable costs?
these rise and fall in direct proportion to the number of units produced e.g raw materials used in production
What are semi-variable costs?
they have both a fixed and a variable element e.g telephone expenses
What are semi-fixed costs?
these are fixed up to a certain level of activity beyond which point extra fixed cost is incurred e.g hire of specialist machinery/ equipment
What are direct costs?
the costs that can be directly associated with a product e.g Labour costs
What are indirect costs?
the costs that cannot be directly associated with a product such as rent and depreciation
What is full costing?
takes into account both direct and indirect costs associated with manufactured product
What is absorption costing?
full cost i.e. including a fair share of overheads
What are overhead costs?
indirect costs of a business that cannot be associated directly with a product
How do you calculate blanket rate/ pre determined
overhead absorption rate?
total overhead costs/ total production volume (add up all of production)
What is the traditional method of arriving at a fair share of overhead for each individual product?
Step 1- allocate or apportion overheads to cost centres
Step 2- derive absorption rates (e.g per hour the product spent in each department)
How to calculate the absorption rate the traditional way?
time spent by the product in that department x pre-determined absorption rate
What is the ABC (Activity-based costing) view of the absorption process?
the idea that overheads are no longer proportional to the length of time a product spends in each department overheads are caused by specific activities, the volume of which can be measured by “cost drivers”
how do u calculate the absorption rate using the ABC method?
TotalCostDriverUnits/
TotalActivityCost
What is a cost driver with an examples?
are the factors that cause a cost to be incurred e.g. machine hours would impact machine maintenance
How do you calculate overhead per unit?
absorption rate x hours
What is over recovery of overheads?
occurs after absorption rate has been applied throughout the year and products have been charged more than the actual overhead incurred by the year
what is under-recovery of overheads?
occurs after absorption rate has been applied throughout the year and products have been charged less than the actual overhead incurred by the year
How to fix under and over recovery of overheads?
Increase profits at year end if over recovery
Reduce profits at year end if under recovery
When would the traditional method be favoured over the ABC method?
- Simplicity & Cost: Ideal for straightforward operations with limited products.
- Limited Resources: Practical for small companies or startups with fewer resources.
- Homogeneous Products: Effective for businesses producing similar products.
Short-term Decisions: Suitable for quick estimates where precision isn’t crucial.
When would you choose ABC method over the traditional method?
- Complex Operations: Best for businesses with diverse product lines and varying costs.
-High Overheads: Useful when overheads are a significant cost component. - Price & Profitability Analysis: Offers insights into product profitability for pricing strategies.
- Cost Management: Facilitates operational efficiency by identifying resource costs.
- Long-term Decisions: Critical for accurate cost info when making strategic business decisions
