Week 2

Question 1

What is job (order) costing?

Answer 1

Fpcus: specific orders: readily identified (unique) units

ex:construction, aircraft, special-purpose machinery, ships, costum-designed buildings, meet customers special needs …

Industries which manufacture products or render
services against specific orders use this method. (specialised or made-to-order products)

Also called: specific order costing/ production or costing/job lot costing

-the cost unit is an individual order or a batch of a distinct product or a service.

Question 2

What is batch costing?

Answer 2

Another form of job costing. Group of identical or similar
units. The only difference is
that a number of items are
being costed together,
instead of a single item or
service.

Manufacture of furniture,
IPhone 11 Pro Max, Airbus
orders of 40 A330neo and
30 A350s by Emirates.

cost per unit in batch: total production cost of batch/ nb of units in the batch

Question 3

What is process costing?

Answer 3

Continuous operations:
Large numbers/ quantities
of nearly identical products

ex: Chemicals, oil, textiles,
plastics, flour, food
processing, mining, cement

Average cost per unit: net cost of inputs/expected output

Average cost per unit= (total cost of inputs-scrap value of normal loss) / expected output

Question 4

What are the cost apportionment bases for job costing?

Answer 4

A cost apportionment base is the basis used by a business to apportion its overhead costs.

– Direct labour hours (most frequently used)
– Direct labour costs
– Machine hours
– Direct materials percentage (or Direct material cost)
– Units of output
– Floor area occupied, etc

Question 5

What is scrap value?

Answer 5

In cost accounting, scrap value refers to a relatively insignificant amount that a manufacturer receives from the sale of production materials that remain after the manufacture of its products.

Question 6

Describe overheads

Answer 6

Indirect costs or
overheads do not
belong to any specific
product. They have
to be shared amongst
a range of products

Question 7

What is absorption costing?

Answer 7

-cost absorbed into each product

– The overheads are normally charged to the cost centres
(normally departments) that use them
– The departments then charge the overheads to the cost
units (products) they work on

Question 8

What are the 3 methods to re-apportion the costs of service departmets to production departments?

Answer 8

1) direct method:
Reapportions support costs only to the main
operating/production departments.

This is the simplest method and is to use
when service cost centres provide
services to production cost centres, but
NOT to each other.

2)step-down method
Reapportions support costs only to the main
operating/production departments.

(3:Reciproca method)

Question 9

What is apportioning?

Answer 9

Apportioning - Overheads will be charged to all cost

centres/ departments

Question 10

What is re-apportioning?

Answer 10

Re-apportioning – Service department costs are charged

to production departments

Question 11

How would you apportion depreciation?

Answer 11

Basis: machnery cost

Question 12

How would you apportion suppervison?

Answer 12

Basis: number of employees

Question 13

Describe the step-down method

Answer 13

1) allocate/ apportion all OH to the cost centres (departments)

2) service centres to
charge (reapportion) the overheads to the main
production centres. Why?

The service departments do not work on any of the
products so cannot charge or absorb the overhead
costs

3)absorption

Question 14

How do we reapportion OH of service centres?

Answer 14

The service departments’ overheads will be
reapportioned on the basis of the amount of work
done for the other departments

Question 15

Which service departments de we re-apportion first?

Answer 15

• the one which serves all departments

- has the greater costs

Question 16

What is Overhead absorption rate?

Answer 16

When all costs are reapportioned to production departments, they must absorb their OH to the products they produce.

OAR= budgeted expenditure/ budgeted activity

Here activity could be the amount of work carried out: machine hours, labour hours

OAR tells us how much cost of OH is caused per h in each department

Question 17

Which absorption basis to choose?

Answer 17

The choice of an absorption basis is a matter of judgement
and common sense. There are no strict rules or formulae
involved. But the basis should realistically reflect the
attributes of a given production centre.

Some examples of absorption basis:
Percentages of direct materials cost, direct labour cost, prime
cost, rate per machine hour, per direct labour hour etc.

Question 18

How do we caculate under/over-absorption

Answer 18

Total overheads absorbed = OAR x actual activity

Over-absorption = Total overheads absorbed > Total actual overhead

Under-absorption = Total overheads absorbed < Total actual overhead

Question 19

What is the impact of using different absoption baes?

Answer 19

-As a worst case, people’s jobs could be at stake
• Costing methods could potentially be a political
tool within organisations.
• They can affect organisations’ capacity to
understand costs and make appropriate decisions
accordingly
-Choice of basis can make a difference.

Question 20

What are the advantages of absorption costing?

Answer 20

Improved managerial awareness of total costs
sustained by cost centre
Selling prices can be established to cover full
“product” cost
Absorption costing must be used to value closing
inventory for financial accounts
Overhead absorption rate is used for budgeting
purposes (discussed in later lectures)

Question 21

What are the problems of absorption costing?

Answer 21

Arbitrary re-apportionment of overheads can lead to
incorrect decisions being taken
Costs are absorbed based on the budgeted overhead
absorption rate and therefore an under/over
absorption adjustment must be made
Ignores the distinction between fixed and variable
costs

Question 22

Assuming an audit firm such as PwC decides to
use the traditional Absorption costing method to
work out its cost on one audit assignment. How can
they work out the budgeted cost of an audit for say
Bank of America or Goldman Sachs (two of their
known clients)?

Answer 22

In addition to the direct costs of the audit:
Establish the indirect costs – e.g. Audit support including
secretarial, databases charges etc.
Use budgeted chargeable audit hours as budgeted activity
(denominator for OAR). Numerator being the overhead costs.
Calculate OAR –
Total budgeted overheads/Total chargeable hours
Budgeted cost of one audit “job”:
(Overhead absorption rate x number of professional hours) +
Traceable direct professional audit team hours

Question 23

How would you reaportion maintennabce?

Answer 23

basis: service hours

Question 24

What is the advantage that is claimed for charging OH to jobs on a cost centre basis and why is it claimed?

Answer 24

-charging OH tojobs on a department basis involves picking up OH that are specific to each department and adding to them a share of OH that are general to a business as a whole. Oh of servicde departments are then reapportionned to production departments. At the end stage the OH of the whole business eqauls to the sum of OH aportioned to the production departments.

In theory dealing with OH on a departmental basis is more costly than on a business-wide basis. In practice, however, it may not make much difference to the cost of collecting the information. This is because these different departments may have different OH. Assigning Oh on a departmental basis takes this into account when calculating the cost of job.

Question 25

departmental or factory wide (single) OAR?

Answer 25

conditions for factory wide absorption: only on type of product produced, tus oH charged is the same for all departments=same rate applies for a business as a whole

departmetal OAH: different producing departments

In practice, departmentalising overheads may not provide information that is significantly different from that when OH are cahrged to jobs on a factory-wide basis.

Question 26

What are revelavnt costs? (3)

Answer 26

1) relate to the objective of the business and has an effect on wealth creation. Those costs that will be affected by a decisions
2) future cost
3) vary with decisions (potential costs and benefits associated with different decisions)

Relevant costs are Avoidable costs that are incurred only when making specific business decisions.
Through relevant cost approach unnecessary data is eliminated that could complicate the decision-making process

• Other things being equal, in deciding
between two options one with the lower
total relevant cost would be chosen.

ex: manufacturing labour, rearrangement costs

Question 27

What are sunk costs?

Answer 27

• actual costs incured in past period
• irrelevant because they cannot be changed by any decision
• shown in financial accounts as asset (capitalised) or expense
  ex: market survey already taken

Question 28

What are opportunity costs?

Answer 28

• describes the value (in monetary terms) of being dprived of the nexr best opportunity in order to pursue a particular objective
• relevant to a particular decision if they differ between alternative courses of action

ex: loss of income to students by deciding to study
or loss ov return that could be made of 1000 pounds in a company stock A when placing them in a mutual fund B for one year

‘The value of the benefit sacrificed when one
course of action is chosen, in preference to an
alternative. The opportunity cost is represented
by the forgone potential benefit from the best
rejected course of action.’

E.g. return expected from an investment other
than the present one.
It is the cost of being deprived of the next best
option.

-Never recorded in formal accounting records
since they do not generate cash outlays.

Question 29

Describe how to choose an allocation basis

Answer 29

• would not make sense to choose depending on level OH allocated to particular job
• Total OH will remain the same irrespective of how they are apportioned between jobs
• OH are dominated by machine-related costs (power, maintenance, depreciation and so on) : can be argued that the machine-hours basis gives more relevant costs

-Possible alternative
: dealing with machine related OH costs (power) on a machine-basis
: dealing with more “people related” OH (light and heat) on a direct labour hour

Question 30

What is the formula for reaporshionment for the direct method?

Answer 30

(portion x cost) / (portion + other cost centre position)

Question 31

What are non relevant costs?

Answer 31

Non-relevant costs will remain unaltered
regardless of a decision. They do not necessarily depict true loss in the value of an asset due to the decision.
Some examples are:
• Sunk or past costs
• Total Fixed overheads that will not increase
or decrease
-absorbed fixed cost
-depreciation charge
• Expenditure that will be incurred in the future,
but as a result of decisions taken in the past
that cannot now be changed.

Question 32

What is a replacement cost?

Answer 32

The relevant cost of a material that is used regularly is its
replacement cost.

Question 33

Is a driectly attributable fixed cost relevant?

Answer 33

yes

Question 34

Besides cost what other factors should be considered?

Answer 34

– Non-financial quantitative factors
e.g. on-time flight arrivals for an airline company (or
even A&E hospital waiting times)
– Qualitative factors
i.e. outcomes that cannot be measured in numerical
terms. Examples: employee morale, customer
satisfaction.