Week 5 Flashcards
What type of costing will we be learning today?
Activity based costing
Is activity based costing the same to Traditional absorption costing ( OR FULL COSTING METHOD)?
No they are very different
Remerbering when finding out total product costs ( cost per unit attached to each product) of a manfuacturing firm what do we add together and what is the difference with Marginal costing
Direct labour + Direct material + Overhead ( FOH AND VOH)
Direct labour + Direct material + Overhead ( VOH) The FOH are treated as Period costs
With Traditional Overhead aborsption costing, how are overheads allocated?
The overheads or indirect costs are all allocated uniformly to cost units using one cost driver e.g. direct labour hours or sometimes machine hours ) and it is a blanket rate.
What is a problem of using a blanket rate for assigning overheads to different departments?
A department might have mutliple products and different level of specilaisation.
If a product is less specialised and simple to use, then what ?
There shouldn’t be a lot of expenditure absorbed per unit for that product compared to a product more specialised. This may lead to a situation of undercosting highly speicialised products and overcosting easy, high volume products.
In traditional overhead absroption costing, what is the problem with low end mass market, high volume products?
They absorb most of the overheads, even though they dont cause them,
In terms of complexity, cost and benefits, which one is higher ABC OR TAC?
Activtiy based costing
So what is the main difference between traditional absorption costing and Activitiy based costing in terms of how cost is assigned?
ABC methods expand the number of indirect cost pools (these are expressed in activities) that can be allocated to specific products. The traditional method takes one pool of a company’s total overhead costs to allocate universally to all products.
What is an activitiy cost pool?
( amount of money you spend on an activity)
With an activity cost pool what do you have to identify?
You have to identiffy a cost driver that will derive the cost up e.g. lets say the activity cost pool is ordering and receiving materials the cost driver is the number of purchase orders.
When finding overhead abosrbed per unit, what do you have to find as compared to Traditional absorption costing?
Mutliple activity rates which you can assign to product, but with Traditional absorption costing, it is one overhead rate
What is the difference in ABC and TAC in terms of products and period costs?
With traditional costing, we only talk about product costs (allocating MOH), no period costs.
But with ABC, we can allocate period costs e.g adminstration expenses, might be relevant to allocate to the products.
In mordern history what is there been there been an increase?
Relative increase in indirect overheads costs for business to direct costs) and there are high levels of specialisation and product diversification as opposed to mass production.
When looking at ABC what can you see that is clearly different to Traditional absorption costing?
In traditional costing, indirect costs went to production departments.
You only allocate cost to cost objects if it requires the activity to be performed.
Show a diagram that nicely displays ABC alloaction?
Would ABC assign sustaining costs such as factory security guards wages to products?
Activity-based costing treats these types of costs as period costs rather than product costs.
Again reitarting the idea, lets say a factory is not running, in ABC costing, should the product take on costs?
No they shouldn’t
In this what are the cost drivers?
Activity (cost pool) Total cost
Materials handling £10000
Engineering £30000
Power £24000
Total £64000
Link Cost pools with cost drivers
Total overhead is £64000
Cost drivers are:
Production volume
Direct material cost
Engineering change notices
Kilowatt hours
Direct labour cost
Materials handling —— Direct material cost
Engineering —– Engineering change notices
Power ——- Kilowatt hours
Find the cost driver rate (make sure you put the right units ?
Activity (cost pool) Total cost
Materials handling £10000
Engineering £30000
Power £24000
Total £64000
Activity cost driver rate = Total costs in activity cost pool /Activity cost 𝐝𝐫𝐢𝐯𝐞𝐫 𝐮𝐧𝐢𝐭
Apply the cost driver rate to the question now to get to the total overhead absorbed using activity cost pools
Activity (cost pool) Total cost
Materials handling £10000
Engineering £30000
Power £24000
Total £64000
Can you now work out overhead absorbed per unit?
Activity (cost pool) Total cost
Materials handling £10000
Engineering £30000
Power £24000
Total £64000
Product costs = DM + DL +OH, which is given in the question so we can add all of this together?
We are now going to compare to traditional absorption costing, we are going to use Direct labour cost as the basis?
Find unit overhead costs ( cost per unit)
( we are not allocating cost to anywhere)
What is the unit indirect cost for Ed light manfacturing ( NOT PRODUCT COSTS)? ( ABC )
What is the differences in unit overhead costs of traditional costing approach and ABC?
What does these numbers show about ABC and Traditional absorption costing?
L utimate overhead cost was cheaper than first thought
L plus overhead was more expensive than first thought
L1 overhead was cheaper than first thought
So this means L ultimate and L1 was overpriced and Lplus underpriced
This wrong pricing can have a direct negative impact on prices.
If you decide to produce L plus your profits may reduce.
