Ch2: Costs and Management Accounting Flashcards
(1) Marginal Costing (MC) (2) Absorption Costing (AC) (3) Activity Based Costing (ABC) (4) Cost Drivers (5) Analysis of ABC (6) Comparison of ABC and Traditional Methods (24 cards)
What is Marginal Costing (MC)?
A costing method where fixed overheads are treated as period costs and not included in unit costs.
(i.e. Written off in full in the P&L in the period that it occurs).
Fixed overheads are written off in full in the P&L in the period they occur.
How are inventories valued in Marginal Costing?
Inventory valuation includes only the variable costs of production.
What is Absorption Costing (AC)?
A costing method where fixed production overhead costs are allocated, apportioned, and absorbed into product costs.
Define ‘Allocation’ in Absorption Costing.
The process of assigning overhead costs to the cost centres to which they belong as they are incurred.
What is the purpose of ‘Apportionment’ in Absorption Costing?
To distribute overheads that are common to multiple cost centres.
What does ‘Absorption’ in Absorption Costing entail?
Total overheads in each production department must be absorbed into the production units using various methods.
What is Activity Based Costing (ABC)?
A method of costing that identifies costs and the drivers of resource consumption.
How does Traditional Absorption Costing differ from ABC?
- Traditional Absorption Costing uses a single method for apportioning overhead costs.
- ABC identifies activities that incur costs and apportions costs based on activity usage.
What is the impact of product volume on apportioning overhead costs between products in traditional Absorption Costing?
It may lead to inaccuracies as it does not account for the diversity of activities among products.
What is the significance of cost drivers in Activity Based Costing?
They determine the cause of overhead costs and are used to allocate costs to products based on their usage.
List the steps involved in implementing Activity Based Costing.
(1) Identify major activities.
(2) Group overheads into activities (cost pools).
(3) Identify cost drivers for each activity.
(4) Calculate cost per unit of cost drivers.
(5) Absorb activity costs into production based on usage.
What are Cost Drivers?
Factors that can cause a change in the cost of an activity.
Overhead Absorption Rate (OAR) formula
OAR =
[ Budgeted Production Overheads / Budgeted Level of Activity ]
OR
[ Overheads / Total Hours Worked ]
What are some advantages of Activity Based Costing?
- More accurate cost per unit
- Better decision-making
- Improved pricing strategies
- Enhanced understanding of cost causes
- Straightforward overhead control
- Better performance measurements
What are some disadvantages of Activity Based Costing?
- Time-consuming and expensive
- Limited benefits if overheads are volume-related
- Reduced benefits for single or similar products
- Based on budgeted overheads, which may not suit future decisions
Key differences between Traditional Absorption Costing (TAC) and ABC on the following:
(1) Initial Allocation and Apportionments of Overheads.
(1) Initial Allocation and Apportionments of Overheads
- TAC = Is to Cost Centre’s.
- ABC = Is to Cost Pools which represents a particular activity.
Key differences between Traditional Absorption Costing (TAC) and ABC on the following:
(2) Absorption of Overheads.
(2) Absorption of Overheads.
- TAC = Based on the volume of output as some costs may not depend on volume.
- ABC = Based on the cost drivers that causes the costs to vary as it is more accurate.
Key differences between Traditional Absorption Costing (TAC) and ABC on the following:
(3) Activity Costs.
(3) Activity Costs.
- TAC = These are included in the departments blanket Overhead Absorption Rate (OAR).
- ABC = Only the cost of performing the activity will be included.
Key differences between Traditional Absorption Costing (TAC) and ABC on the following:
(4) Output and Control of Overheads
Can Activity Based Costing be applied in service industries?
Yes, ABC can be used in both service and manufacturing industries.
True or False: Marginal Costing includes fixed overheads in product cost calculations.
False
Fill in the blank: ABC aims to identify the activities that cause ______ to be incurred.
[overhead costs]
What is a potential downside of implementing ABC?
The cost of implementing ABC may exceed the benefits for some businesses.
What does ABC enable managers to do regarding overhead costs?
Exercise greater control by focusing on managing the causes of these costs.
