Management Accounts: Costing

Question 1

What is allocation?

Answer 1

Where total overheads are charged to the relevant cost centres in full

Question 2

What is Apportionment?

Answer 2

Sharing overheads across cost centres using a fair basis

Question 3

What is reapportionment?

Answer 3

When all service cost centres are shared out between production cost centres

Question 4

What is absorption?

Answer 4

when overheads are split into the cost units they relate to using a suitable basis

Question 5

What is the equation or overhead absorption rate?

Answer 5

Production (budgeted) overhead/(budgeted) activity level

Question 6

What is the equation for amount absorbed?

Answer 6

Actual production activity/overhead absorption rate

Question 7

What is one advantage and one disadvantage of absorption costing?

Answer 7

A: Takes fixed costs into account unlike marginal costing. D: the nature of the cost behaviour is some what arbitrary/estimated

Question 8

What 3 indirect cost make up overheads?

Answer 8

Materials, labour and expenses

Question 9

What is a responsibility centre?

Answer 9

A function or a department of an organisation that is headed by a manager who is directly responsible for its performance

Question 10

What is a flexed budget?

Answer 10

budgets designed to change as volume of activity changes

Question 11

What is the formula for high-low costing?

Answer 11

High Cost - Low Cost / High Output - Low Output

Question 12

What is marginal/variable costing?

Answer 12

When goods/services are priced based on only variable costs, not fixed costs are included

Question 13

What is the equation for Contribution?

Answer 13

Sales Value - Variable Cost of Sales

Question 14

What is the formula for Breakeven Sales Volume?

Answer 14

Total Fixed Cost/Selling Price -Variable Cost per Unit

Question 15

What is the formula for Prime Costs?

Answer 15

Direct Materials + Direct Labour + Direct Expenses

Question 16

What is the formula for Overhead costs?

Answer 16

Indirect Materials + Indirect Labour +Indirect Expenses

Question 17

What is the formula for Minimum Inventory Level?

Answer 17

Reorder Level - (Average Usage x Average Lead Time)

Question 18

What is the formula for reorder level?

Answer 18

(Max Inventory Usage x Max Lead Time) + Buffer Inventory

Question 19

What is the formula for Maximum Inventory Level?

Answer 19

Reorder Level + Reorder Quantity - (Min Usage x Min Leadtime)

Question 20

What is the formula for Average Inventory Level?

Answer 20

Minimum Inventory + 1/2 Reorder Quantity

Question 21

What is a stepped cost?

Answer 21

A cost that increased with a certain activity level ie. if one manager is need per 30,000 units, then four are needed for 120,000 units

Question 22

What is over-absorption?

Answer 22

When more overheads are absorbed than incurred

Question 23

What is under-absorbtion?

Answer 23

When fewer overheads are absorbed than incurred

Question 24

What is the formula for amount absorbed?

Answer 24

Actual production activity x OAR

Question 25

What are some benefits of absorption costing? (3)

Answer 25

• Inventory valuation using absorption costing complies with IAS 2
• Takes fixed costs into account which must be covered
• Production cannot be separated from fixed costs as without them it would not occur in the first place

Question 26

What are some drawbacks of absorption costing?

Answer 26

• Unit cost includes costs which are not relevant to marginal decision making
• The nature of cost behaviour is obscured
• The method of absorption is to some extent is arbitrary