Marginal, absorption and activity based costing

Question 1

What are the two costing systems often used in management accounting ? P203

Answer 1

• Marginal costing
• absorptiohn costing

Question 2

What does marginal costing do ? P203

Answer 2

• Helps - short term decision making

Question 3

What does absorption costing calculate ? P203

Answer 3

• Calculate - inventory valuations and profit/loss financial statements

Question 4

What does the use of eachh system depend on ? P203

Answer 4

• Information needs - business
• can we afford etc - marginal costing
• how much profit we made - absorption costing

Question 5

What type of costs to absorption and marginal costing systems use ? P203

Answer 5

• Same product and period costs - behaviour difference
• product costs - part of manufactured product
• period costs - not part of manufactured product - statement P/L

Question 6

What is the definition of marginal costing ? P203

Answer 6

• Cost - one extra unit of output

Question 7

What classifications of costs are used to help with short-term decision making? P203

Answer 7

• behaviour classsifications - assist with short term
• Variable
• Fixed
• Semi variable ( fixed and variable)
• marginal - each extra unit of output

Question 8

What is marginal costing the total of ? P203

Answer 8

• Variable product costs - direct materials, labour, expenses, variable production overheads
• Not fixedperiod costs - rent & factory
• decision making = marginal costs of unit = variable costs - producing on more unit

Question 9

What does knowing the marginal costs help management with ? P203

Answer 9

• Management focus - each unit contribution
• selling price less (marginal/ variable product costs) = contribution

Question 10

What can contribution be calculated on ? P204

Answer 10

• Per unit basis
• Batch of output
• whole business

Question 11

What is the difference between sales revenue and variable cost usd for ? P204

Answer 11

• cover - fixed period costs
• remaining = profit

Question 12

How can a business workout its profit from its operations, and what is the calculation for this ? P204

Answer 12

• Using:
• marginal statement
• total contribution
• fixed costs figures
• total contribution less fixed production costs = operating profit

Question 13

In what order is contribution applied towards overheads from the marginal costing statement ? P204

Answer 13

• fixed production
• non production overheads

Question 14

What is absorption costing ? P206

Answer 14

• Recovers - costs of business amoungst cost units
• What does it costs to make one unit of output?

Question 15

What is the absorption costs of a unit of output made up of ? P206

Answer 15

Direct materials + direct labour + direct expenses + production overheads(fixed and variable) = absorption cost

Question 16

What do production overheads usually comprise of ? P206

Answer 16

• Factory costs
• indirect materials
• indirect labour
• indirect expenses

Question 17

Why must absorption costingg be used for financial statements ? P209

Answer 17

• IAS 2
• direct materials, labour, expenses , production overheads
• non production overheads - niether absorption / marginal - period costs

Question 18

What is activity based costing ? P211

Answer 18

overheads to production - basis of activities

Question 19

How does activity based costing work ? P211

Answer 19

• causes of overheads
• not total overheads for period
• costs drivers and not Overhead recovery methods

Question 20

What are cost drivers ? P211

Answer 20

• Activities - causes costs to be incurred
• cost per unit of product - use of activities

Question 21

What are costs pool? P214

Answer 21

• Group of overhead costs - same activity

Question 22

What are the steps of applying activity based costing ? P215

Answer 22

1st - group togehte rcosts pool - same activity e.g. - purchasing costs of goods
2nd - identify cost driver - e.g. placing order costs
3rd - charge costs rate to production = use of activity= two POs required / two activities