Lecture 4 Flashcards
(17 cards)
What is the absorption costing method?
A method where both variable and fixed manufacturing overheads are included in the cost of a product.
List the steps to handle overheads on a cost centre basis.
- Allocate direct overheads to relevant cost centre
- Apportion general overheads between all cost centres
- Add all allocated and apportioned overheads
- Re-apportion overheads from service cost centres to production cost centres
- Calculate total overheads for each product cost centre
- Determine an overhead absorption rate for each product cost centre
- Absorb overheads into cost units as they pass through production
What is the formula for calculating the overhead absorption rate?
Overhead absorption rate = Budgeted production overhead / Budgeted activity level of the chosen absorption base
Define over-absorption.
Charged overheads > actual overheads
Define under-absorption.
Charged overheads < actual overheads
What is the treatment of under/over-absorption in financial statements under IAS 2?
- Under-absorption = Expense item
- Over-absorption = Revenue item
What are the disadvantages of traditional full costing?
- Less suitable for modern manufacturing
- Low direct labour costs
- High indirect costs
- Inaccuracy in competitive environments
What is Activity-Based Costing (ABC)?
A method that allocates overheads based on activities that consume resources, providing more accurate cost attribution.
Key features of Activity-Based Costing (ABC) include:
- Traces indirect costs to products/services through activities
- Aims for accurate cost per unit
- Based on cost drivers
What is the main difference between Traditional Full Costing and Activity-Based Costing?
Traditional Full Costing uses department as the cost allocation basis, while Activity-Based Costing uses activity.
What is variable costing also known as?
Marginal costing
Under variable costing, what costs are included in the cost of a product?
- Direct materials
- Direct labour
- Variable manufacturing overheads
How is fixed manufacturing overhead treated under variable costing?
Treated as a period cost and expensed immediately.
What is the impact of absorption costing on profit?
Profit is affected by production volume; producing more can increase profit even without sales.
What is the impact of variable costing on profit?
Profit is affected by sales only; production without sales does not impact profit.
What are the pros of variable costing?
- Easier break-even analysis
- Shows contribution margin
- Better decision-making for pricing and production
What is a con of variable costing?
Not acceptable for financial reporting under IAS 2, as it does not include fixed manufacturing overhead in product costs.
