Week 9: Full Costing Flashcards
What is the definition of Full Costing?
Full Cost = Total amount of resources sacrificed to achieve a particular objective.
What is Direct Costs and examples of it?
- Costs that can be identified with specific cost units (products).
- E.g. materials and labour on a job.
What is Indirect Costs and examples of it?
- All other elements of production cost that cannot be identified with cost units (products)
- E.g. factory rent, power, indirect materials.
How do we account for overheads in a single-product business?
Full cost per product= Total manufacturing costs (direct and indirect)/ Units produced in the period
When may it be better to use Marginal Costing instead of Total Absorption Costing?
MC may be better to use when:
- Deciding whether to accept special contracts
- Deciding whether to make or buy
- Deciding how to use scarce resources
When may it be better to use Total Absorption Costing instead of Marginal Costing?
TAC may be better to use when:
- Setting selling prices
- Valuing stocks
- Monitoring manufacturing costs
What is Under-absorption and when may it occur?
If actual costs or actual production are NOT as budgeted, absorption costing can lead to:
– Under-absorbed costs:
when actual production costs > absorbed production costs (based on budgeted figures)
What is Over-absorption and when may it occur?
If actual costs or actual production are NOT as budgeted, absorption costing can lead to:
– Over-absorbed costs:
when actual production costs < absorbed production costs (based on budgeted figures)
What is Activity Based Costing (ABC)?
Activity Based Costing (ABC) recognises that it may be incorrect to apportion fixed costs on conventional bases – overheads do not just happen, they are caused by something.
- ABC focuses on ’cost drivers’ – activities that cause the overhead costs in the first place
- ABC should lead to more accurate costing which should better reflect the cost of production
What are the advantages of Activity Based Costing?
o Focuses on cost drivers
o More meaningful cost product costs should be obtained
o Provides more accurate information costing
o Product profitability is more accurately measured
What are the disadvantages of Activity Based Costing?
▪ May be difficult to associate a cost with a driver and measure the effect of the activity on that cost
▪ Calculations are more complex and may not be worthwhile if the information is not used properly
▪ Costs associated with compiling and maintaining up-to-date information
How do we account for overheads for multi-product businesses?
