Lecture 3- Cost Allocation Flashcards
What is an absorption costing system?
A costing system that allocates all manufacturing costs, including fixed manufacturing costs, to products and values unsold stocks at their total cost of manufacture
What is an Activity Based Costing (ABC) system?
A system of cost allocation that aims to use mainly cause and effect cost allocations by assigning costs to activities
What is a cost centre?
A location to where costs are allocated, also known as a cost pool
What is a cost driver?
The basis used to allocate costs to cost objects in an ABC system
What is the under or over recovery of overheads?
The difference between the overheads that are allocated to products or services during a period and the actual overheads that are incurred
What does lifestyle costing contrast?
Lifestyle costing contrasts with traditional costing methods, where one would write off design and development costs in the income statement. By capturing all the committed costs of a product, it’s much easier to assess a product’s profitability.
What happens to costs at the introductory stage?
Costs will be incurred in marketing and advertising. Sales revenue will be high. Production costs will be high, but decline as the product goes into growth owing to increasing returns. In the growth stage, sales and revenue will start to tail off.
What happens to sales revenue as the product approaches maturity?
Sales revenue will stabilize.
What happens in the decline stage?
A surprising increase in marketing costs, as manufacturers try and shift obsolete inventory to make way for the replacement. Sale prices are low.