Product Costing Flashcards
Product costing
Product costing is the process of finding out how much it takes to make one product.
Job costing
Job costing is work carried out specifically at the request of a customer eg. Wedding dress
4 reasons product costing
- To get SP
- To control costs
- To value stock
- To aid planning and decision making
To get SP
The SP must reflect cost of producing the product along with an anticipated profit.
To control costs
In order to control costs it’s necessary to compare budgets costs with actual costs
To value stock
In order to complete final accounts @end of financial period, necessary to know value of OS and C.S.
Prudence and Closing Stock Valuation
- when preparing accounts, caution should be exercised
- losses can be anticipated by gains cannot
- to ensure profits are not overstated and losses understated
- if C.S. overvalued , profits overstated
- therefore stocks valued at lower of cost or net realizable value.
Incorrect valuation of stock affects
- Financial statements of two years ie C.S. one year OS next year
- Figures Cost of Sales, GP, NP
- BS: CA , Working Capital
- In Ratio Analysis: Stock Turnover , %markup on cost, GP %, NP %, current ratio
Absorption
The method by which costs are charged to units of products in order to be recovered. OAR for each dept can be calculated using a suitable basis eg..
OAR and basis
Overhead Absorption Rate
No of units produces
Labour hrs
Machine hrs
Under/over absorption
In dept X, costs incurred were 5000 less than expected , therefore profits are 5000 greater than expected
Apportionment
Where overheads cannot be specifically identified but are shared or divided between departments using an appropriate basis of apportionment.
Allocation
Where OH costs can be specifically identified and charged to a particular dept or cost center. These overheads are allocated to that dept.
Transfer service dept to prod dept
- service depts cannot recover costs as no production takes place in them
- they are secondary to prod depts
- as result, service dept. costs must be transferred to prod depts on an equitable basis eg. Machine hrs
- OH can only be recovered if included in costs of production
Reapportionment
This is the term used where service dept. costs are reapportioned/ divided between production depts because overheads can only be recovered by being included in the cost of production.
Why is OAR based on budgeted figures
- actual costs may not be known until the end of year
- businesses can not wait until then to decide cost of product
- they need to decide SP for rendering purposes
explain, with examples, controllable and uncontrollable costs
Controllable
- can be controlled by the manager of a cost centre
- they will make the decision about the amount of cost
- can be held responsible for variances
- all VC are controllable
controllable cost eg
commission to sales personnel
uncontrollable costs
- manager of cost centre has no control
- can’t be held responsible for variances
uncontrollable cost eg
rates to local authority
outline the role of the management accountant in an organisation
(GCBCDC)
- Gathers info required to formulate plans
- records costs, providing details of cost of products and depts
- participates in creation and execution of budgets
- assists in control of operations by comparing actual costs w budgeted costs
- ensures relevant data is provided to managers on a timely basis, and is readily understandable
- carries out valuation of CS used in financial statements
management accountant def
POCD
The management acct. is a key member of a business’ organisation team making a vital contribution to areas of planning, organising, controlling and decision making.
outline the differences between marginal and absorption costing
- There is a difference in the profit figures as CS is valued differently
- Under marginal costing CS valued lower than under absorption
- When costing a product, marginal doesn’t include FC while absorption does
- therefore a share of FC is included in the value of stock under absorption and not included under marginal
explain diff. between marginal and absorption - eg.
under absorption, CS is valued at 1/10th of production cost = …
under marginal, cs is valued at 1/10th of VC=
Difference is 400, therefore profit difference = ,,,
