Question 8 Flashcards
What is meant by re-apportionment of costs?
This is the term used where service department costs are re-apportioned / divided between production departments because overheads can only be recovered by being included as part of the cost of production
Why is it necessary to transfer service department costs to production departments?
Because overheads can only be recovered by being included as part of the cost of production
Explain over-absorption of overheads
Over-absorption is when costs are over recovered – budgeted costs are greater than actual costs
What is the role of a cost and management accountant?
- establishes the cost of producing a product or service or running a department
- projects the future cost of a product /service and cost of running departments
- prepares production, departmental and master budgets
- compares the actual cost of a product/service with the budgeted costs
What are direct costs?
Direct costs are costs that can be traced or directly linked with a given cost object e.g direct wages or materials
What are indirect costs?
Indirect costs are costs that cannot be traced directly to a given cost object e.g. A supervisor’s salary, insurance
What is a step fixed cost?
Step fixed costs are costs that are fixed within a certain range of activity but change outside of that range e.g. Rent could be fixed up to a certain level of production. However, if production increases and results in the rental of more factory space, then the vent would increase to a new level, thus, the fixed coots would increase in steps
Explain why overhead absorption rates are based on budgeted costs rather than actual costs
The product needs to be costed at the time of order but actual costs may often not be known until the end of the year. A business cannot wait until then to set the selling price of a product for a customer
Explain ‘under absorption’ of overheads and how it might arise in a manufacturing firm
Under absorption is when costs are under-recovered. Budgeted costs are less than actual costs. This may be due to:
- actual labour hours used in themanufacturing process could be higher than budgeted for
- there could have been errors in estimating overheads
-Overhead expenses are higher due to unforeseen events e.g. higher depreciation of assets than expected
What effect does overvaluing closing stock have on gross profit
This will have the effect of reducing the cost of sales and in turn increasing the gross profit figure in the trading account
Limitations of marginal costing (cost volume profit analysis)
- we assume variable cost per unit remains the same regardless of output which is not always the case
- we assume that selling price will remain the same. However, sometimes a firm may have to offer discounts to attract new customers
- it is assumed that all mixed costs are easily separated into fixed and variable. The high/low method can be used for this purpose but it is not always possible to do so
Prudence concept and valuation of stock
The prudence concept states caution should be exercised when preparing financial statements. Therefore, only realised profits should be included in the accounts. However, provision should be made for all expected expenses and losses. The prudence concept ensures that profits are not overstated and losses not understated. If closing stock was overvalued then profits would be overstated. Therefore stocks should be valued at the lower of cost or net realisable value
Role of the management accountant
Makes a vital contribution to the managerial functions of planning, controlling and decision making.
- preparing data required for formulating plans
- recording costs and providing details of the costs of products and departments
- participation in the creation and execution of budgets
What are the reasons for product costing?
• establishes selling price for tendering purposes
What is the margin of safety?
The reduction in sales that can occur before the break even point of a business is reached
