Session 3: Full costing Flashcards
What did we learn in AC100 about ‘Out of marginal costing and Full costing, which is preffered by management accountants’?
Marginal costing preffered for decision making and performance evaluation.
Under Marginal costing what is total product cost?
Direct labour + Direct materials + Variable manfuacturing overheads. Fixed manfuacturing overheads are treated as period costs, and written off against the total contribution.
What is the income statement of marginal costing?
Fixed costs are treated as period costs and written off total contribution.
What is the problem of marginal costing?
With contribution margin analysis only variable costs are treated as relevant as most costs become variable in the long run. But in the long run fixed costs( especially fixed overheads may grow precisely as a result of short term decisions. E.g. accepting repeat special orders.
What does variable costs assumes that costs mainly variable with and is this correct?
They assume costs mainly vary with volume, hence it is a traditional cost allocation base for indirect costs, but there are many other cost drivers including technology, product complexity, so these need to be cost allocation bases.
What is a Flexible cost and what is a committed cost? ( Mainly used for Variable costing)
Committed - acquired in advance and contractually fixed .
Flexible - acquired when needed ( id inventory tags)
What is variable/fixed costs? ( mainly used for variable costing)
What is direct/indirect costs? ( mainly used for full ABC costing)
Variable/fixed – change with volume or does not change with
volume
• Flexible/committed – acquired in advance and contractually fixed
or used as needed.
These costs are mainly used for variable costing.
What is a common cost and what is a standalone cost?
it’s a shared costs of creating a product or providing a service that can’t be attributed to a single department or user.
A standalone cost are non shared costs of creating a product or service that can be attributed to a single department or user.
Catogorize these costs into direct or indirect costs, stand alone or common costs and Fixed or variable? Costs of material Labour costs Specialist machines Facilities and other equipment.
Costs of material = direct, variable and stand alone.
Labour cost = Direct, fixed/variable( depends on contract) and stand - alone.
Specialist machines - indirect ,fixed and Stand alone.
Facilities and other equipment - indirect, fixed and common
What is full absorption costing and how can companies be profitable?
It is the sum of all the costs ( indirect and direct costs) related to a product or service until its delivered. For companies to be profitable the price of products must be higher than costs incurred.
What is the difference between Cost tracing and cost allocation?
Cost tracing( directly matching a cost with the product being produced) Cost allocation:uses estimates to apply costs to products.( is for allocating indirect cost which cannot be directly traceable to a product/service)
EXPLAIN THIS
When costs are incurred direct costs are immediately allocated the product, whereas indirect costs, the total amount of costs spent on activity ( cost pools) are charged to departments and then allocated through allocation rate by chosen allocation base.
What are the steps of cost allocation ( indirect cost allocation) in full costing
5 STEPS?
1) Identify different types of indirect costs( e.g. manufacturing overhead costs)
2) Choose an allocation base for each type of indirect cost ( e.g. direct labour as a base of MOH)
3) Find the sum of the indirect costs and the sum of allocation base ( e.g. MOH = £100000 and total DL = £50000)
4) Calculate an allocation rate ( Percentage) = Total indirect costs be allocated( MOH) / Allocation base ( e.g. total direct labour costs) = Allocation rate (%)
5) Use allocation rate to allocate the indirect cost to respective cost object(product).
What is an important step you have to do when allocating indirect cost to respective cost objects, so this is step 5?
You add an extra cost( mark up) to each product which should correspond to the indirect cost.
Calculated as: allocation rate (%) X the products cost for the chosen allocation base
If e.g. allocation key/markup is 200% and DL for product A is £100 per unit, the mark up
for manufacturing overhead costs for product A is
200%*100 = £200 per unit
What is the full product cost using absorption costing?
What is the full cost of a service company?
Whats the first thing we do here?
Work out MOH OVERHEAD, SG&A OVERHEAD, ( there is no INDIRECT MATERIALS, SO DONT NEED TO CALCULATE OVERHEADS)
Fill in table
Question: The market expectations change and this causes
budgeted volume for iPhone 6 plus to drop from 10 million
units to 8 million units. How does the full cost per unit for each
product change?
A. The full cost for all three products are unchanged?
B. The full cost for all three products decreases
C. The full cost for all three products increases
D. The full cost for iPhone 6 plus decreases, and the other products are
unchanged
E. The full cost for iPhone 6 plus increases, and the other products are
unchanged
WORK OUT FULL COST PER UNIT AGAIN
REMEMBER TOTAL MOH = 400 AND TOTAL ADMIN = 195
C is the answer
