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Flashcards in Week 6 - Costs for Management Decision Making Deck (10)
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1

What is inlcuded in Costs of Sales?

  • Cost of sales is the product (or service) cost => Production Costs
    • The cost of providing a service
    • The cost of buying goods sold by a retailer
    • The cost of raw materials and production costs for a manufacturer 
  • Cost of sales are the direct or prime costs, indirect costs or production overhead

2

What is included in Expenses? (subtracted from gross profit to get operating profit)

  • Period costs: Non-production overhead
  • Selling, administration (and finance expenses)

3

What is the purpose of overhead allocation? /what is it?

- The process of spreading production overhead (i.e. indirect costs) equitably over the volume of production 

4

What is the overhead allocation problem?

Overheads can be arbitrarily allocated across products/services which can lead to inappropriate pricing and misleading information about product/service profitability 

5

What are the three methods for Overhead allocation?

  1. Variable costing
  2. Absorption costing
  3. Activity-based costing 

6

What are the two ways to calculate the budgettet overhead rate for the absorbtion method?

Business wide

By cost centre

7

What are the three steps in the absortion method when using cost centre rates?

1.Identify indirect costs with particular cost centres where possible

2.Determine a suitable method of allocating other costs across the cost centres

3.Allocate service cost centre costs to production cost centres 

8

What are the three steps for activity based costing?

  1. Trace costs for business processes to cost pools
  2. Identify cost drivers for each cost pool
  3. Determine number of activities for each cost driver 

9

Difference between absorbtion costing and activity based costing (ABC)?

Absorption vs. Activity-based Costing

  • Under both methods, direct labour and material costs are the same and the total overhead incurred is the same
  • Under absorption costing, overheads are allocated in proportion to an arbitrary allocation base, typically direct labour hours - the more labour hours allocated to a product/service, the more overhead will be allocated to it.
  • Under activity-based costing, overheads are traced through their drivers (the causes of activity) to the product/services that consume those activities - the more overheads a product/service causes to be incurred, the more overheads will be allocated to it. 

10

Formulae for sensitivity analysis

• Net profit = revenue – (fixed costs + variable costs)w