Costing Methods Flashcards
(15 cards)
Job Costing
- cost unit consists of single order or contract
- work moved through operations as continuously identifiable unit
- often a estimate/quote provided that is costs plus profit with mark up or margin
Batch Costing
- cost unit that consists of separate readily identifiable group of units
- cost of single unit too small to be measured
- cost per unit = total batch cost / number of units in batch
Service Costing
costing method concerned with establishing the costs of services rendered
- businesses in service industry
- to establish cost of services carried out by service departments
Cost per service unit =
= total costs for period (including O/Hs)/ number of service units in period
What are the characteristics of service organisations?
SHIP
Simultaneous production & consumption of service, not inspect for quality
Heterogeneous - service received vary each time as reliant on people
Intangible - actual benefit can’t be touched
Perishable - can’t be stored
When would composite cost units be used?
- often in service costing as difficult to define realistic cost unit
- includes 2 measurements that a cost will be based on
- cost per kg per km
What are the purposes of service department costing?
- internal service
- control costs & efficiency of service departments
- control costs of user departments and prevent unnecessary use
What are the bases that could be used for charging service costs fl user departments?
- no charge at all
- total actual cost
- standard absorption cost
- variable cost
- opportunity cost
- cost plus margin for profit
Activity Based Costing (ABC)
- modern alter to absorption costing to overcome problem that different overheads have different basis’ / cost driver
- each group of O/Hs that driven same = cost pools
- identify cost drivers for each
- calculate cost per unit of cost driver & absorb
What are the pros of ABC vs traditional absorption costing?
- avoids reapportionment
- uses many cost drivers for to reflect real life
- leading to more accurate product costing
Life Cycle Costing
- cost a product/service over entire lifecycle and maximise return over whole life
- from development to decline
Target Costing
- setting a target cost by subtracting desired profit margin from competitive market price
- idea that cost reduction should happen throughout products life as often too late by production
Target Cost
- estimate of product cost using target costing
- may be less than the planned initial cost but is expected to be achieved by time product reaches maturity stage
= target selling price - target profit
What is a major criticism of cost plus pricing methods?
- ignore external factors so unlikely to maximise profits that business will generate
Cost Gap =
= estimated product cost - target cost
efforts made to close cost gap or design out costs before production
