MA Week 2 Flashcards
3 stages of absorption costing + describe
- Allocation
- exactly where cost belongs - Apportionment
- overheads charged to cost centres (normally departments) that use them - Re-apportionment
- charging ^ costs from service departments to main/production departments
Does full costing involve fixed costs or variable costs?
Both.
Full costing = Direct cost (variable) + Indirect cost (fixed & variable)
Why do we do cost apportionment/re-apportionment?
B/c we cannot trace indirect costs (overheads) to a cost object
3 types of full costing systems
- Job-order costing
- SPECIFIC, made-to-order ORDERS, unique job
- each cost object can be clearly identified - Batch costing
- Group of identical or similar units. The only difference is that a number of items are being costed together, instead of a single item or service. - Process costing
- continuous operations, eg. chemicals
- standardised products, produced in the same way, consume the same amount of direct costs & overheads
How to calculate the Average cost per unit for Process costing?
NET Cost of inputs / Expected output
*NET Cost of inputs = Total cost of inputs - SCRAP VALUE OF NORMAL LOSS
What happens after (re-)apportionment?
Absorption, of overheads into products using an an Overhead Absorption Rate
ie. Departments charge costs to cost units (products)
2 re-apportionment methods:
Step-down vs Direct
Step-down - service depts serving each other, or at least one service dept serves to others, besides serving the core functions
Direct (easier) - no service between service depts, only between service depts & core functions
How to choose which service department to re-apportion first?
^This is for the step-down method. If direct method, it doesn’t matter.
Highest cost in the department
OR (least selfish) serving the most no. of departments
eg. Canteen serves all dept.s so re-apportion first
Overhead Absorption Rate (OAR) + Why do we calculate this?
Budgeted overhead expenditure / Budgeted level of activity
For budgeting & planning. Used as a basis for comparison with actual cost.
*we can estimate Budgeted OAR at the start of the period, but Actual OAR is known only at the end of the period
4 impacts of using different absorption bases
- A department manager could be wrongly reprimanded and the dept. be cut down unjustly, while the other department might get a pay raise unnecessarily
- Can affect organisations’ capacity to understand costs and make appropriate decisions accordingly
- Worst case scenario, ppl could lose jobs
- Costing methods could be used as a POLITICAL TOOL within organisations (related to 1.)
4 advantages of absorption costing
- Improved MANAGERIAL AWARENESS of total costs sustained by cost centre & Gives managers a holistic picture
- Selling prices can be established to cover full “product” cost
- Used for valuing closing inventory (lower of cost or NRV) for financial accounts
- Overhead absorption rate used for budgeting purposes, as a ‘standard’
4 problems with absorption costing
- Arbitrary re-apportionment of overheads can lead to incorrect decisions being taken (ie. the assembly vs paint shop costs)
- Costs are absorbed based on budgeted OAR and so there is a RISK of an under-/over-absorption; adjustment MIGHT need to be made
- Ignores the distinction between fixed and variable costs (important to distinguish)
- Subject to manipulation - tactically increase inventory stock to manipulate profits to appear higher
Direct vs Indirect costs
Direct costs can be clearly identified with {/directly traced to} a specific cost object
e.g. direct materials used in a product
Indirect cost cannot be clearly identified with a particular cost object
e.g. factory rent and electricity
Can a given cost item be both a direct cost and an indirect cost? Give an example.
Yes.
eg. cost of a supervisor of a department of a factory…
- Direct cost of the dept.
- Indirect cost b/c supervisor’s salary is part of the factory overhead costs that must be absorbed by the products
