Chapter 2: Traditional Costing

Question 1

What can the total costs of an organisation be categorised into?

Answer 1

Production Costs
Non-Production Costs

Question 2

What can production costs be broken into?

Answer 2

Direct Costs
Indirect Costs

Question 3

What is a direct cost?

Answer 3

Costs directly involved in production and attributable to each unit of production

Question 4

What is an indirect cost?

Answer 4

Costs that can’t be directly attributed to each unit, such as rent, depreciation and supervisors

Question 5

What are product costs?

Answer 5

Charged to the individual product and matched against the sales revenue they generate in the period in which they are sold.

Question 6

What are period costs?

Answer 6

Costs which are charged in full to the statement of profit or loss in the period in which they are incurred.

Question 7

What type of cost is fixed production costs in marginal costing?

Answer 7

Period Costs

Question 8

What type of cost is fixed production costs in absorption costing?

Answer 8

Product Costs

Question 9

How do you calculate the overhead absorption rate?

Answer 9

Budgeted overhead cost/Budgeted quantity of absorption base

Question 10

How do you calculate if overheads have been under or over absorbed?

Answer 10

Overheads absorbed (OAR x actual units) - Actual overheads incurred

If positive then overheads have been over absorbed. If negative they have been under absorbed.

Question 11

What are some advantages of absorption costing?

Answer 11

Fixed costs can be a significant part of total costs
This method is required for financial reporting processes
Under/Over-absorption can identify inefficient utilisation
There is an argument that in the longer term, all costs are variable

Question 12

What are the disadvantages of absorption costing?

Answer 12

Requires arbitrary apportionment and allocation of overheads
The absorption basis may not actually drive the overhead cost
More complex then marginal costing
Encourages over-production

Question 13

What are the advantages of marginal costing?

Answer 13

Simple
Avoids arbitrary allocation and absorption of overheads
Better for short-term decision making
Profits only rise if sales rise (not production)

Question 14

What are the disadvantages of marginal costing?

Answer 14

Fixed overheads may be significant
Some direct costs may be fixed

Question 15

How to calculate absorption costing or marginal costing using the other?

Answer 15

Absorption costing profit
(increase)/decrease in inventory x fixed overheads per unit

= Marginal costing profit

Question 16

If inventory increases the profit would be higher under which costing method?

Answer 16

Absorption

Question 17

If inventory decreases the profit would be higher under which costing method?

Answer 17

Marginal

Question 18

If inventory stays the same the profit would be higher under which costing method?

Answer 18

Both profits are the same

Question 19

How to calculate selling price using absorption costing and a mark up?

Answer 19

Selling Price = full cost per unit x (1+ mark-up percentage)

Question 20

What are the advantages of using absorption costing and mark up to calculate selling price?

Answer 20

Ensures all production costs are covered
Can be used to justify price rises

Question 21

What are the disadvantages of using absorption costing and mark up to calculate selling price?

Answer 21

Ignores customers and competitors
Doesn’t reflect the incremental cost of new orders

Question 22

How to calculate selling price using marginal costing and a mark-up?

Answer 22

Selling Price = Marginal cost per unit x (1 + mark-up percentage)

Question 23

What are the advantages of using marginal costing and mark up to calculate selling price?

Answer 23

Useful for incremental orders
Avoid arbitrary overhead allocations

Question 24

What are the disadvantages of using marginal costing and mark up to calculate selling price?

Answer 24

Ignores customers and competitors
Doesn’t cover all costs in the long run

Question 25

How to calculate selling price using a margin?

Answer 25

Selling price = Total cost / (1 - required margin)