Lecture 9 Flashcards
How would you calculate the total product cost?
Prime cost + production overhead
What are prime costs?
Direct materials
Direct labour
Other direct cost of production
What is included in production overhead?
Indirect material
Indirect labour
Other indirect costs of production
What’s the structure for a statement of cost of a production item?
Direct materials
Direct labour
Other direct costs
Prime cost
Indirect materials
Indirect labour
Other indirect costs
Production overhead
Total product cost
What are the control documents for purchases?
Purchase order
Purchase request
Purchase debit note
Purchase invoice
Purchase returned
Goods received
Cash purchase
What are the control documents for sales?
Sales order
Quotation
Credit note
Invoice
SQL POS
Cash Sales
Delivery Order
What are waste materials?
Materials that have no value
What are scrap materials?
Materials that have no value
Overhead costs that are spread over the cost of all the service provided
What are scrap materials?
Waste material that can be sold for disposal, usually at a low price
What are the types of pay schemes?
Monthly salary
Basic salary plus extra payment depending on output levels of targets achieved
Hourly rate based on actual hours worked
Piecework based on number of items of output or units of service
Benefits in kind
Employer”s labour costs, such as an employers contributions to national insurance
Performance related pay (PRP): based on measurable output
Merit pay: based on quality of achievement
What’s the basic calculation for labour cost?
Hourly cost x number of hours worked
What would the direct costs in a salary be?
Labour spent on each product
What would the indirect costs be in a salary?
Work spread over a range of jobs and activities
How would you calculate the direct labour costs?
Direct hours worked x hourly rate for each employee
How would you calculate the indirect labour costs?
Any labour costs not identified as direct
What are some samples of production overheads in a manufacturing business?
Repair of machinery
Rent of factory buildings
Safety procedures
What are some examples of production overheads in a service business?
Cost of transport to jobs
Replacement of tools
Protective clothing
What does allocate mean
Assign whole item of cost to single cost unit
What are the requirements for allocate and apportion?
Fair to all parties
Representative of benefit
Relatively quick to apply
Understandable
What does apportion mean?
Spread cost over two or more cost units
What would the method of apportionment over cost centres be for rent of building?
Floor area of each cost centre
What would the method of apportionment over cost centres be for lighting?
Floor area of each cost centre
What would the method of apportionment over cost centres be for power for machines?
Number of machines in each cost centre
What would the method of apportionment over cost centres be for production supervisor’s salary?
Number of employees in each cost centre
What would the method of apportionment over cost centres be for canteen costs?
Number of employees in each cost centre
What would the method of apportionment over cost centres be for depreciation and insurance of machinery?
Value of machinery in each cost centre
What would the method of apportionment over cost centres be for maintenance department?
Number of machines in each cost centre
What would the method of apportionment over cost centres be for employees’ restaurant and coffee bar?
Number of employees in each cost centre
What would the method of apportionment over cost centres be for stores department?
Total value of stores requisitions from each cost centre
What would the method of apportionment over cost centres be for finished goods quality inspection?
Value of goods produced by each cost centre
What would the method of apportionment over cost centres be for safety inspectors?
Number of employees in each cost centre
What are the steps to a traditional approach to flow of overhead costs?
Step 1: allocate and apportion indirect costs to cost centres
Step 2: apportion service cost centre’s costs to prosecution cost centres
Step 3: absorb overhead costs into products
How would you calculate the production overheads?
Indirect materials + indirect labour + other indirect costs
What are the methods of absorbing overheads?
Cost per direct labour hour
Cost per machine hour
Cost per £ of labour cost
Cost per unit
Predetermined overhead rates
When are the predetermined overhead cost rates estimated?
At the start of a reporting period
Where are predetermined overhead cost rates adjusted to?
Actual at the end of the period
What is activity based costing?
A method of allocating overhead costs to products and services
What are the 5 stages to answer the question of “what drives cost?”
- Identify activities
- Identify cost drivers that influence the cost of an activity
- Crete a cost pool for each activity
- Calculate cost rate for each pool
- Allocate costs to products using drivers for each activity
What are the traditional costs for overheads?
Cost centres
Overhead cost rate
Allocate cost using cost rate to measure consumption of cost
What are the activity based costs for overheads?
Cost pools
Cost driver rate
Allocation cost using cost driver rate and estimated demand for cost
What is the job costing system?
- System of cost accumulation where there is an identifiable activity for which costs may be collected
- Activity usually specified in terms of a job of work or a group of tasks contributing to a stage in the production or service process.
What is different about absorption costing in comparison to marginal costing?
- All production costs are absorbed into products
- Unsold stock is valued at total cost of production
What is different about marginal costing in comparison to absorption costing?
- Only variable costs of production are allocated to products
- Unsold stock is valued at variable cost of production
- fixed production costs are treated costs are treated as a cost of the period in which they are incurred.
What is the difference between absorption costing and marginal costing due to?
The timing of matching the fixed overhead with products
What are some arguments in favour of absorption costing?
- bc all costs are incurred with view to creating a product for sale, all costs should attach to products until sold
- in long term, fixed overhead costs must recovered through sales if the business is to survive - setting stock value by reference to full costs encourages a pricing policy which covers full cost
- created a smoothing of these fluctuations by carrying the fix3 costs forward until the goods are sold
- if fixed costs treated as period costs and low level of sales activity in a period then low profit or loss will be recorded - if high level of sales activity there will be a relatively high profit
What are some arguments in favour of marginal costing?
- useful in decision making
- in short term, relevant costs are required for decision making and fixed overhead are largely non-relevant bc they can’t be avoided (best seen as a committed cost of the period)
- profit calculation not affected by changes in stock levels
- avoids risk of carrying forward in stock an element of fixed overhead cost (may not be recovered through sales)
- in short term, full cost pricing may result in loss of sales which would have made a contribution to fixed costs and profit
- where sales volumes are declining but output is sustained, marginal costing gives the profit warning more rapidly than absorption costing does.
