A2-Apply different costing methods

Question 1

1. Applications of absorption costing

Answer 1

step1:Allocation and apportion of indirect costs;
step2:Reapportion of the indirect costs;
step3: Absorption.
Once the overheads are allocated and apportioned to the production departments the overheads need to be related to or absorbed into the units of product.

Question 2

2. Advantages of absorption costing

Answer 2

1. Understand the full product cost
   - for pricing
   - for measuring and controlling products
2. Ensure that the financial statements conform to accounting standards
   - comply with IAS 2 inventory on accounting for inventory
   - this includes fixed production overheads so long as it is allocated on a systematic and consistent basis.
3. Conform to the matching concept
   - the adjustment to closing inventory ensures that cost of sales are matched to the sales value when the goods are sold
   - stabilise fingures and avoid extreme profits and losses being reported

Question 3

3. Disadvantages of absorption costing

Answer 3

1. Profits for a period can be manipulated by simply changing production levels.
2. It is based on the assumption that overheads are volume related.
   - Our fixed production overheads account for ?% of total production costs and include the costs of operating the …(energy, staff, depreciation and maintenance) as well as general factory running costs.
   - Under our current absorption costing system, all of this cost is treated as one and is absorbed into units of production at a rate of … per direct labour hour.
   - However, not all of these fixed production overhead costs are driven or caused by direct labour hours. For example,…

Question 4

4.The steps in the process of implementing ABC

Answer 4

1. identify the activities that are necessary to production
2. establish cost pools
   -each cost pool will include all of the costs associated with activities where those costs are driven by the same driver.
   -the cost of resources consumed during a period need to be allocated to each activity, in a separate cost pool.
   3.establish cost drivers
   -each cost pool will need a cost driver which is the factor that drives the level of cost.
   -cost drivers are the factors that cause an increase or decrease in the cost performing the activities.
   investigate what it is that drives the cost, that is, the activities that cause the cost to be incurred.
   4.calculate the cost driver rate by dividing the $ cost pool by the number of cost drivers.
3. charge costs to the products dependent on their consumption of activities and resource.

Question 5

5. the activity based costing

Answer 5

an activity based costing system will normally result in a different share of production overheads being charged to the products where three main factors apply:

1. the majority of production overhead costs are not volume related;
2. production overhead costs are a significant proportion of total production costs and
3. the product range is diverse.

Question 6

6. advantages of activity based costing

Answer 6

1. the information obtained from an ABC system will influence our view on both product profitability and product pricing.
2. more detailed information about why production overheads arise and by knowing this we are more able to control these costs.
3. focus on key activities not only reducing cost and increasing value to our customers.
4. extended beyond product costing to a range of cost management applicaitons known as activity based management.

Question 7

7. disadvantages of ABC

Answer 7

1. it is time consuming and expensive to implement.
2. will be of limited benefit if overhead costs are primarily volume related.
3. reduced benefit if the company is producing only one product or a range of products with similar costs.
4. complex situations may have multiple cost drivers.
5. some arbitrary apportionment may still exist in deciding the cost drivers.

Question 8

8. principles of marginal costing

Answer 8

1. marginal costing is based on a principle whereby variable production costs only are charged to cost units and the fixed costs attributable to the relevant period are written off in full against the contribution for the period.
2. the main impact under marginal costing is that we would no longer absorb fixed production overheads into the cost of each product, instead these fixed production overheads would be treated as period costs.
3. opening and closing inventory will no longer be valued at the fully absorbed cost, but will instead be valued at variable costs only. this means that the inventory value will always be lower under marginal costing. it also means that where inventory levels change in a period under marginal costing our profit would be different to that under absorption costing.

Question 9

9. advantages of marginal costing

Answer 9

1. a considerable saving in time when preparing management report. there will be no need to prepare calculations of absorption rates, nor will there need to be calculations of over and under absorption of production overhead in the monthly management accounts.
2. the information provided in the reports will be more useful for decision making because the cost per unit will be on a contribution basis rather than a full cost basis. arbitrary absorption of overhead is avoided.
3. profit depends on sales and efficiency, not on production levels. no incentive to over-produce to boost closing inventory and to therefore to increase profit for a period in the management reports.
4. slightly simpler variance analysis.

Question 10

10. disadvantages of marginal costing

Answer 10

1. not all the costs are purely variable or fixed//fail to cover fixed costs.
2. does not comply with IAS2 inventories.

Question 11

11. principles throughput accountig

Answer 11

1. the aim of throughput accounting is to maximise throughput contribution (sales revenue less direct materials), while at the same time reducing operational expense and investment.
2. operating expense is the cost incurred to convert the raw material into the finished goods. Operating expense usually comprise of labour and production overheads.
3. investment is the monetary value invested in inventory and non-current assests, in other words the money tied up in assets in order that lottie grahite can make the throughput.

Question 12

12. benefits of throughput accounting

Answer 12

1. the product mix can be optimised by maximising the throughput contribution per hour of bottleneck resource.
   - this is calculated in the same way as limiting factor analysis, where the bottlleneck is the limiting factor.
   - therefore, we benefit by maximising our short-term profits by using throughput accouting to determine the optimal production plans.
2. management`s focus will be set to alleviating the pressure on a bottleneck as this will reduce delays in the product process that reduces the throughput. this may mean finding ways to ensure that bottleneck is fully ultilised.
3. any process that occurs prior to the bottleneck will also be examined. therefore, management will reduce activity in the process that occur before the bottleneck which in turn will usually reduce costs.