Week 2 Flashcards
(34 cards)
What is job (order) costing?
Fpcus: specific orders: readily identified (unique) units
ex:construction, aircraft, special-purpose machinery, ships, costum-designed buildings, meet customers special needs …
Industries which manufacture products or render
services against specific orders use this method. (specialised or made-to-order products)
Also called: specific order costing/ production or costing/job lot costing
-the cost unit is an individual order or a batch of a distinct product or a service.
What is batch costing?
Another form of job costing. Group of identical or similar units. The only difference is that a number of items are being costed together, instead of a single item or service.
Manufacture of furniture,
IPhone 11 Pro Max, Airbus
orders of 40 A330neo and
30 A350s by Emirates.
cost per unit in batch: total production cost of batch/ nb of units in the batch
What is process costing?
Continuous operations:
Large numbers/ quantities
of nearly identical products
ex: Chemicals, oil, textiles,
plastics, flour, food
processing, mining, cement
Average cost per unit: net cost of inputs/expected output
Average cost per unit= (total cost of inputs-scrap value of normal loss) / expected output
What are the cost apportionment bases for job costing?
A cost apportionment base is the basis used by a business to apportion its overhead costs.
– Direct labour hours (most frequently used)
– Direct labour costs
– Machine hours
– Direct materials percentage (or Direct material cost)
– Units of output
– Floor area occupied, etc
What is scrap value?
In cost accounting, scrap value refers to a relatively insignificant amount that a manufacturer receives from the sale of production materials that remain after the manufacture of its products.
Describe overheads
Indirect costs or overheads do not belong to any specific product. They have to be shared amongst a range of products
What is absorption costing?
-cost absorbed into each product
– The overheads are normally charged to the cost centres
(normally departments) that use them
– The departments then charge the overheads to the cost
units (products) they work on
What are the 3 methods to re-apportion the costs of service departmets to production departments?
1) direct method:
Reapportions support costs only to the main
operating/production departments.
This is the simplest method and is to use
when service cost centres provide
services to production cost centres, but
NOT to each other.
2)step-down method
Reapportions support costs only to the main
operating/production departments.
(3:Reciproca method)
What is apportioning?
Apportioning - Overheads will be charged to all cost
centres/ departments
What is re-apportioning?
Re-apportioning – Service department costs are charged
to production departments
How would you apportion depreciation?
Basis: machnery cost
How would you apportion suppervison?
Basis: number of employees
Describe the step-down method
1) allocate/ apportion all OH to the cost centres (departments)
2) service centres to
charge (reapportion) the overheads to the main
production centres. Why?
The service departments do not work on any of the
products so cannot charge or absorb the overhead
costs
3)absorption
How do we reapportion OH of service centres?
The service departments’ overheads will be
reapportioned on the basis of the amount of work
done for the other departments
Which service departments de we re-apportion first?
- the one which serves all departments
- has the greater costs
What is Overhead absorption rate?
When all costs are reapportioned to production departments, they must absorb their OH to the products they produce.
OAR= budgeted expenditure/ budgeted activity
Here activity could be the amount of work carried out: machine hours, labour hours
OAR tells us how much cost of OH is caused per h in each department
Which absorption basis to choose?
The choice of an absorption basis is a matter of judgement
and common sense. There are no strict rules or formulae
involved. But the basis should realistically reflect the
attributes of a given production centre.
Some examples of absorption basis:
Percentages of direct materials cost, direct labour cost, prime
cost, rate per machine hour, per direct labour hour etc.
How do we caculate under/over-absorption
Total overheads absorbed = OAR x actual activity
Over-absorption = Total overheads absorbed > Total actual overhead
Under-absorption = Total overheads absorbed < Total actual overhead
What is the impact of using different absoption baes?
-As a worst case, people’s jobs could be at stake
• Costing methods could potentially be a political
tool within organisations.
• They can affect organisations’ capacity to
understand costs and make appropriate decisions
accordingly
-Choice of basis can make a difference.
What are the advantages of absorption costing?
Improved managerial awareness of total costs
sustained by cost centre
Selling prices can be established to cover full
“product” cost
Absorption costing must be used to value closing
inventory for financial accounts
Overhead absorption rate is used for budgeting
purposes (discussed in later lectures)
What are the problems of absorption costing?
Arbitrary re-apportionment of overheads can lead to
incorrect decisions being taken
Costs are absorbed based on the budgeted overhead
absorption rate and therefore an under/over
absorption adjustment must be made
Ignores the distinction between fixed and variable
costs
Assuming an audit firm such as PwC decides to
use the traditional Absorption costing method to
work out its cost on one audit assignment. How can
they work out the budgeted cost of an audit for say
Bank of America or Goldman Sachs (two of their
known clients)?
In addition to the direct costs of the audit:
Establish the indirect costs – e.g. Audit support including
secretarial, databases charges etc.
Use budgeted chargeable audit hours as budgeted activity
(denominator for OAR). Numerator being the overhead costs.
Calculate OAR –
Total budgeted overheads/Total chargeable hours
Budgeted cost of one audit “job”:
(Overhead absorption rate x number of professional hours) +
Traceable direct professional audit team hours
How would you reaportion maintennabce?
basis: service hours
What is the advantage that is claimed for charging OH to jobs on a cost centre basis and why is it claimed?
-charging OH tojobs on a department basis involves picking up OH that are specific to each department and adding to them a share of OH that are general to a business as a whole. Oh of servicde departments are then reapportionned to production departments. At the end stage the OH of the whole business eqauls to the sum of OH aportioned to the production departments.
In theory dealing with OH on a departmental basis is more costly than on a business-wide basis. In practice, however, it may not make much difference to the cost of collecting the information. This is because these different departments may have different OH. Assigning Oh on a departmental basis takes this into account when calculating the cost of job.
