Week 2 Flashcards
What do we mean about cost behaviour?
is an indicator of how a cost will change in total when there is a change in some activity, so cost behaviour can be fixed, variable semi variable etc.
What do we mean by Cost traceability?
Whether the cost can be traced to some level of production or output, so we can have direct and indirect costs
Remind me again what is product costs in manufacturing?
Direct materials + Direct labour + Manufacturing overheads.
What is process costing?
When a firm usually have homogenous products, with large numbers, for example oil.
What is batch costing?
When costs are related to a group of units of products or services rather than to each individual unit of product or service.
What is job order costing
When you assign accumulating manufacturing costs of an individual unit of output. This is used when the various items produced are sufficiently different from each other and each has a significant cost. e.g. aircraft
When i want to order a slide for example, what do I have to generate from job order costing?
You have to generate a job order cost sheet, this is the cost for the job, using having direct materials, direct labour and Manufacturing overheads
The question is how do we apportion ( distribute) overhead costs, to each unit we produce?
The answer is that you will have to use some bases to apportion the costs, which we have to find a predetermined rate to apportion these costs.
Give example of some bases commonly used?
Direct labour hours Direct materials used Floor area occupied
Lets say you had a heating overhead, what bases would you use to apportion cost?
Machine hours for example
Here is an example of a cost card, the question is how do we decide how much overhead to charge or absorb in each product, as overhead costs can not be traced to a product direcly?
We use absorption costing in job order costing ( or full costing)
What is Absorption costing?
Absorption costing is a method for accumulating the costs associated with a production process and apportioning them to individual products
Under absorption costing how do we work out total product costs?
Direct Materials
+ Direct Labor
+ Variable Overhead
+ Fixed Overhead
= Total Product Cost
How is the product cost in absorption costing different to marginal costing?
Product cost = Direct materials, direct labour, variable manfuacturing overhead ( changes with output) but not FOH, under variable costing we treat FOH as period costs( expenses in I/S)
What does COGS mean in absorption costing?
DM+ DL + VOH + FOH
Is absroption costing an estimate or not?
Its an estimate of how much overhead should be absorbed in each product.
In absroption costing where are the overheads charged to?
The overheads are normally charged to the cost centres ( normally departments that use them e.g. lets say you have £1 mil worth of bills, then this is distrubted amongst each of the business departments.
When departments receive overheads, what do they do?
They charge the overhead to the cost units (products) they work on
Is it fair that departments like canteen absorb overhead costs?
No service departments shouldn’t absorb cost, as they serve main production departments, so we have to reapportion the cost( distrubute cost again)
What are 2 ways to reapportion cost from service departments into main production departments?
Step down method and Direct method.
What is the step down method?
allocates the cost of a service department to other service departments as well as to operating departments.
What is the direct method?
You are not reapportioning within the fellow support departments, they simply shove costs into all the production departments.
When do we use step down method and when do we use direct method?
If the support departments are serving each other as well, than it makes sense to reapportion each other first
If not serving each other mutually direct method makes sense.
What is the different between apportioning and reapportioning?
Apportioning - Overheads will be charged to all cost centres/ departments.
Re-apportioning – Service department costs are charged to production departments
What is the formula for the OAR?
OAR = Budgeted Production overhead / Budgeted Activity level
If the apportioning bases are floor space(rent), no of orders(ordering costs), value of machinery(machine depreciation) and chef wages and there is department A B and canteen, show a visual diagram of apportionment.
Show with a visual diagram of reapportionment with canteen, production department 1 and 2.
As canteen doesnt work on production it must recharge overheads to the production departments on a reasonable bases
We are now looking at a step-down example ( we want to find out how much x and y should absorb of the overheads)
First of all what are the cost bases?
Floor space (sq.m)
Value of machinery (£)
No of employees
Assign an appopriate bases to each and calculate overhead absroptation rate for each ( use previous page absorption bases)
So food and drink allocated to canteen, so we dont have to find a rate
Rent and rates ( floor speace sq.m) 18000/30000 = £0.60/m^2
Heating and light ( floor space sq.m) 12000/30000 = 0.4/m^2
Depreciation ( value of machinery) 30000/300000 = 0.1/ £
Supervision ( no of employees) 24000/80 = 300/ employee
Fill in the banks with OAR rate.
So we have apportionedd 88000 across the 4 departments but canteen and maintence are not the main production departments so what do we have to do and what basis should we apportion with?
We need to reapportion these costs, as canteen services all the 3 departments, we reapportion first as they are the least selfish.
We are going to reapportion using bases of number of employees as its the most sensible
So now reaapportion canteen with NO of employees as bases?
step 2. The maintenance department provides 12,000 service hours to Dept. 1 and 10,000 hours to Dept. 2,
this is gping to help us reapportion maintence overhead, so find OAR for the maintence department and reapportion maintence to dept 1 and 2
you add 12000 + 10000 = 22000
OAR = Budgeted Production overhead / Budgeted Activity level
11000/22000 = 0.5/hour
Dept 1 = 0.5/hour X 12000 = 6000
Dept 2 = 0.5/hour X 10000= 5000
So we have reapportioned canteen first and Maintence, what are the phrases we say to mean the same thing?
We have the overhead costs owned up by Dept 1 which add up to 47000 and costs owned up by deptment 2 which add up to 41000.
Next step says that 3. Dept. 1 is machine intensive and Dept. 2 is labour intensive 4. Budgeted machine hours for Dept.1 is 6,320 and budgeted labour hours for Dept. 2 is 7,850 so what do we have to do now?
We need to work out how many hours of work is going on in each of the 2 departments based on how much is the overhead cost per hour in each of the 2 departments
. Dept. 1 is machine intensive and Dept. 2 is labour intensive 4. Budgeted machine hours for Dept.1 is 6,320 and budgeted labour hours for Dept. 2 is 7,850
Calculate OAR on each department based on the information above
Final step states that Department.1 spends 2 machine hours on a unit of product X and 1.5 hours on a unit of product Y 6. Department.2 spends 3 labour hours on a unit of product X and 4 hours on a unit of product Y ( final step of finding how much OH abosrbed in each product.)
APPLYING OH RATE WHICH TELLSYOU HOW MUCH COST OF OVERHEADS IS CAUSED PER HOUR IN EACH OF THE TWO DEPARTMENTS. we can now calculate how much OH is absorbed in product X and Y.
What does £30.54 and £32.04 mean?
All the overhead costs we have in the factory, for each unit we must own up this much cost.
How do you calculate total overhead absorbed?
Total overhead absorbed = OAR x Actual activity
What does Over absorption and under absorption mean?
Over-absorption = Total overheads absorbed > Total actual overhead
Under-absorption = Total overheads absorbed < Total actual overhead
1) For example when a firm budgets how much overheads it will use a year it 100000 expenditure and use 10000 hourss on machinethis means OAR = 10/h, at the end of the year you have actually used 9000 hours of machines which means Total overhead absorbed is 90000, what does this mean?
2) What would happen if your bills were £85000 at end of the year and you bugeted £80000
This means there is an over absorption of 10000
Underabsorbed 5000, this wil be adjusted and added to COS
Now lets look at a direct method example (more simple)
Scenario 1 First we will use Total direct labour hours as the ONLY cost re-apportionment basis for BOTH service departments
As the service departments don’t serve each other, whats the first thing we should do? `
Work out OAR of direct departmental costs, using lets say the basis of Direct labour hours
SO that would be
Personnel dept = £400000/4000 = 100/h
Facilities dept = 150000/4000 = 37.5/h
Then apply this to the table
Direct method example now lets do another scenario we use an appropriate bases for the service department, what are apporpriate bases for Personnel and Facilities M.?
Personnel: Staff headcount
Facilities Mgmt.: Floor space occupied
Direct method As you have allocated an appropriate bases for the service departments, find the OAR rate and apply to the Production departments
OAR FOR PERSONNEL = 400000/570 = 701.754386 per staff
OAR FOR FACILITIES = 150000/12720 =11.79245383 per m^2
When comparing direct method for the 2 scenarios what can we see?
This shows when you have more apporpriate bases such as Headcount for Assembly and floor space for paint shop, assembly should of been absorbed more by about £48,635.
And paintship were being overcharged (48635)
What is the most important thing to remember for the stepdown method?
The service cost centre that serves most other service cost centres should be reapportioned first
. • Or a service department with highest costs is reapportioned first
Lets do another example of the stepdown method?
As you can see we have to reapportion the service department of Personnel as there costs is the highest so find the bases and OAR RATE AND Apply
1)Personnel: Headcount [no of staff]
OAR = 400000/520 =769.2307692
then apply
Lets do another example of the stepdown method?
Now lets reapportion Facilities M find OAR RATE AND Apply
THEY DO NOT SERVE PERSONEL
Bases = floor space (m^2)
We use the new totals here so
£ 238,462/7,200 +4,500 = 20.38136752 / m^2 then apply
What are 2Advantages of absorption costing
Selling prices can be established to cover full “product” cost
Improved managerial awareness of total costs sustained by cost centre
What are 2 disadvantages of absorption costing?
Arbitrary re-apportionment of overheads can lead to incorrect decisions being taken
Ignores the distinction between fixed and variable costs
Which of the following is not a direct cost for the delivery service of Sainsbury plc to customers?
Select one:
A) Additional travelling expenses of the deliveries
B)The salaries of the company’s marketing managers
C) The wages paid to the delivery staff
D) The costs of the fuel consumption
B The cost object is the delivery service of Sainsbury to customers. Unlike the wages paid to the delivery staff, the salaries of marketing managers cannot be specifically and exclusively traced to the costs of delivery services to the customers.
Which of the following does not belong to manufacturing overheads?
Select one:
Indirect materials
Direct materials
Factory rent
Depreciation of machinery
Direct materials
Which one of the following would be classified as indirect labour?
Select one:
Machinists in a factory producing clothes
Assembly workers on a chocolate production line
A fixed wage of £5 for producing 1 unit of product X
Forklift truck drivers in the stores of an engineering company
Forklift truck drivers in the stores of an engineering company
The Koala Ward of the Great Ormond Street Hospital (GOSH) for Children is responsible for children and young people with craniofacial (head and face) and neurological (brain) problems. The costs of drugs administered by the Koala Ward to patients would be classified as
Select one:
indirect costs of the patients
period costs of GOSH
overhead costs of the Koala Ward
direct costs of the patients
Direct costs to patients
TBA
So what are the 3 stages of absorption?
Allocation, apportionment and absorption
Additional information: • Budgeted hours are 18,960 machine hours for the machining department and 23,550 labour hours for the finishing department.
• The maintenance department provides 6,000 hours of service support to the machining department and 4,500 hours of service support to the finishing department.
Required: (a) Prepare an overhead analysis sheet showing the allocation and apportionment of production overheads to the cost centres.
(b) Calculate the overhead absorption rate for the machining department using machine hours and the finishing department using labour hours
b) OAR FOR MACHINING DEPARTMENT = 379200/18960 =£20/MACHINE HOUR
OAR FOR FINISHING DEPARTMENT = 376800/23550 = £16/ LABOUR HOUR
(c) Calculate the overhead to be absorbed to a product, which is to be manufactured in the near future given that it takes 4 hours of machine time from the machining department and 2 hours of labour from the finishing department.
Part A
Direct costs can be clearly identified with a specific cost object (e.g. direct materials used in a product). Indirect cost cannot be clearly identified with a particular cost object (e.g. factory rent and electricity).
Example of direct costs ( direct labour)
Example of indirect costs - security, depreciation of machinery
Managers distinguish between direct costs and indirect costs as it helps them to deduce the full cost of a unit of output.
Part b
(c) Prepare full costings for Order No 101 using each of the rates calculated in (2) (that is, two separate costings).
The cost sheet for Order No 101 shows the following:
Raw materials £5,000
Direct labour hours 4,000 hours
Machine hours 1,900 hours.
FULL COSTING IS DM + DL + MOH
(d) State briefly which of the two bases of overheads you prefer and why. How might you improve on the two possible costs that you derived in (3) by taking a slightly different approach?
Since the overheads are dominated by machine-related costs (power, maintenance, depreciation and so on) it could be argued that the machine-hour basis gives more relevant costs.
To improve the business should use departmentments or use activity based costing
