Session 6 - Marginal, Absorption and ABC costing Flashcards
When are marginal costing and absorption costing both used?
Marginal - short term decision making
Absorption costing - used to calculate inventory valuations and profit or loss in financial statements
What is the main difference between marginal and absoprtion costing?
Marginal costing is only concerned with the variable costs and the fixed costs for the period are charged to the P&L as an expense.
Whereas in absoprtion costing the fixed costs are included as part of the cost unit.
Name some varibale costs?
Direct mateirals
Direct Labour
Direct expenses
Variable porduction overheads
What is the formula for contribution?
Selling price - variable costs
How to work out profit using contribution?
Contribution (selling price - varibale costs) - Fixed production overheads.
Over a longer period of time which method will state a higher profit?
Total profit in the long run will be the same regardless of what method is used
Which costing method will need to be used when producing financial statements?
Absoprtion costing as this complies with IAS 2
What is acitvity based costing?
ABC charges overheads to production on the basis of activites. The costs are charged based of cost drivers.
What are cost pools?
Cost pools are groups of overhead costs that are incurred by the same activity.
What are cost drivers?
Cost drivers are activities which cause costs to be incurred
Examples: number of set-ups, quality inspections etc.
How is a cost pool used in abc costing?
Cost pools group together the overhead costs which are attributed to the same activity. This makes the attibution of costs through cost drivers much easier, no need to seek a separate cost driver for each overhead cost
What are the advnatages of abc?
Cost info is more accurate because cost drivers are used to identify the activity which causes costs to be incurred leading to more accuracy on selling prices of products
More objective as you can identify costs relating to a specific product not just overheads of the whole business.
Disadvantages of abc?
Time consuming to set up
Selection of cost drivers can be difficult
Which method between absoprtion costing and Marginal Costing will produce more profit and expalin why?
Absorption costing will produce more profit as the closing invenotry figures will have been calculated differently. Marginal values closing inventory at the variable production costs ie: Direct materials and Direct Labour. Whereas absorption costing includes a share of the fixed production costs in closing invenotry valuation.
Explain why the profit figures shouldnt be taken as gospel?
Higher profit does not mean more money in the bank
Two methods treat fixed production overheads differently and in a year where the is no closing inventory profit will be exactly the same
Absoprtion cost must be used for inventory valuatiuon in order to comply with IAS 2
