Management Accounting Flashcards
Costing
Gathering of costing information and its attachments to cost objects (CIMA 2005)
Define and explain absorption costing
The method used to obtain the full cost of a product or a service.
Method:
1. Trace all direct and indirect costs to the cost centres
2. Allocate and apportion production overhead costs
3. Absorb costs into products
Cost Accumulation and Classification
by function, by the element, by nature, by behaviour
Product Costs
those costs that are attached to the products and therefore included in the inventory valuation (raw materials, labour, and production overhead)
Period Costs
Also known as non-manufacturing costs and they are not attached to the products and are not included in the inventory valuation (marketing and admin expenses)
Direct Costs
those related to a given cost object (product, department) and that can be traced to it in an economically feasible way
cost object = product, department or service
a price that can be directly tied to the production of goods or services. direct costs also tend to fluctuation with production levels
Indirect Costs
those that are related to the particular cost object but cannot be traced to in an economically feasible way
How is price calculated when using absorption costing?
Price = cost + percentage for non-production cost + percentage for profit
Elasticity of demand
if a change in price leads to a more than proportionate change in quantity demanded, demand is elastic. Products that can be swapped for a similar product have elastic demand
Value-based pricing
a pricing strategy that sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices.
as per notes: increasing profits by increasing prices on selected products.
Economic Theory: Supply and Demand
Both supply and demand are dependent on prices
“the amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.”
Higher the price, the greater the supply; whereas, as the price decreases, demand increases.
Markup
The amount added to the cost price of goods to cover overheads and profit. The following must be considered:
- competition and market conditions
- covering non-manufacturing overheads
- the desired return
Cost-based Pricing (Cost-plus Pricing)
a pricing strategy in which the selling price is determined by adding a specific amount markup to a product’s unit cost.
Selling price = cost + markup
Return on Investment (ROI)
the ratio between net profit and cost of investment
Variable Cost Pricing
pricing method whereby the selling price is established by adding a markup to total variable costs.
Target Costing
an approach to determine a product’s life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting the desired profit margin from a competitive market price.
Target Cost = Market Price - Desired Profit
Based on the law of supply and demand; to earn a profit, companies must focus on controlling costs
Variable Costs
vary in direct proportion with activity (change in total in proportion to change in the related level of total activitiy)
Fixed Costs
remain constant over wide ranges of activity
Opportunity Cost
Value of the benefit sacrificed when one course of action is chosen over the other
Marginal Costing
the cost of one additional unit of a good or service
Contribution
Contribution = Sales Prices - Variable Costs
It only considers the costs and revenues that change and these are important because decisions are made based on whether the action will produce positive contributions or not
Break-even Point
the point at which neither profit nor loss is made // total revenue = total costs (includes fixed costs & variable costs)
Cost-Volume Profit or Break-Even Analysis
Q = Total Fixed Cost + Operating Profit / Price per Unit - Variable Cost per Unit
Margin of Safety
The excess of planned or actual sales above break-even point and can be expressed as a percentage of the sales estimate
Uses of Break-Event
Initial price setting
Business Plan
Marketing
Cost
Often seen as expenditure and there are many types of costs:
historical/past/sunk cost vs replacement cost
full cost vs marginal costs
actual vs budgeted costs
Overhead Expenses
all costs on the income statement except for direct labor, direct materials, and direct expenses.
Overhead
refers to the ongoing business expenses not directly attributed to creating the product or service.
any expense incurred to support the business while not being directly related to a specific product or service.
Prime Cost
the direct cost of a commodity in terms of the materials and labour involved in its production, excluding fixed costs.
