Lecture 4: Costing Systems Flashcards
(31 cards)
What costs are useful for financial planning and what costs are useful for estimating product/ service costs?
Fixed vs variable costs is useful for financial planning
Direct vs indirect costs is useful for estimating product / service costs
What are the two components of indirect costs?
Indirect costs consist of (I) costs of corporate functions and (II) production overhead (maintenance, depreciation etc.)
What is cost allocation?
Cost allocation: process of assigning indirect costs to products using cost drivers.
Name three reasons to develop a costing system?
- Costing accuracy is critical to a firm’s success
- Costing systems help management estimate costs and accurately charge customers
- Accurate costing systems can provide competitive advantage
What makes cost allocation important?
- Product portfolio decisions (allocate indirect costs to products to estimate product profitability)
- Performance evaluation of business unit managers (allocate support function costs to Bus to estimate performance)
- Execute cost reduction programs (identifying activities causing indirect costs vital for successful cost reduction
Give three important decisions in cost allocation?
- At which detail level do we want to accumulate production costs?
- How do we apply overhead costs to products? Which cost drivers do we use?
- How do we measure costs? At actual, normal or standard rates?
What is job costing?
cost object is a unit of a distinct product, service of project called job. Traces costs to jobs
When is job-costing appropriate?
Different jobs with different amount of resource consumption
Appropriate when most costs can be easily identified with specific job
E.g. construction, advertising, consulting, some production
What is process-costing and when is it used?
for mass production or identical or similar products
Direct material, direct labor and overhead costs are accumulated at departmental level and then averaged to products
Used for computer processes chemicals, textiles, orange juice etc
What is the main difference between job-costing and process-costing?
Main difference is extent of averaging used to compute cost units
What is volume-based costing?
Use volume based cost drivers to allocate overhead
Common volume based cost-drivers are production or sales volume
What is the best way to use volume-based costing in a multi-product firm to measure overhead?
In multi-product firms it is better to measured in terms of a common input factor such as direct labor or machine hours. Overhead should then be proportional to this common input factor used
How are overhead rates budgeted in a volume-based costing system?
Budgeted overhead rates estimated at beginning accounting period by estimating cost driver quantities and overhead costs
What is actual costing?
use actual costs for all product costs
What are actual costs in actual costing system?
Actual costs = Actual direct cost rates * actual usage for the job
How are overhead costs calculated in an actual costing system?
Overhead costs = Actual overhead rate * actual usage for the job
What is normal costing?
uses actual costs for direct material and labor, but predetermined costs for manufacturing overhead
What are the two options of overhead allocation?
- If allocated overhead < actual overhead overhead under allocated
- If allocated overhead > actual overhead overhead overallocated
How are direct and overhead costs calculated in a normal costing system?
Direct costs = Actual direct cost rates * actual usage of the job
Overhead costs = Budgeted overhead rate * actual usage for the job
Name the two approaches of accounting for the difference between overhead allocation?
- Proration approach: difference allocated between COGS, WIP and FG based on relative sizes
- Write-off approach: difference written off to COGS
Compare three characteristics of the ABC Approach to different costing systems?
- ABC increases number of cost pools used to allocate overhead costs
- ABC changes basis used to assign overhead to products
- ABC has higher information demands though
What is overcosting?
product consumes low level of resources but is allocated high costs per unit
Overcosted (high volume) product absorbs too much cost, making it seem less profitable than actually is
What is undercosting?
product consumes high level of resources but is allocated low costs per unit
Undercosted product is left with too little cost, making it seem more profitable than it actualy is
What is the cost hierarchy in ABC Approach?
- BU and Corporate level activities: consumed by several product lines, facilities, and channels
- Facility and channel level activities: don’t depend on individual products or customers
- Product and customer level activities: allows company to make product or serve customer but doesn’t change with number of products or orders
- Order level activities: performed once per order
- Batch level activities: performed for each production run
- Unit level activities: Quantity is proportional to production volume
These different activities require different cost drivers appropriate for those activities
