costing methods
what is a costing method?
calculates the cost of making a product
(e.g., materials, labour, and overheads)
costing methods
what are overheads?
costs incurred that are needed for the factory to operate
costing methods
TRUE OR FALSE: marginal costing doesn’t include overhead costs, in the product cost
TRUE
(left out, due to being time consuming)
costing methods
what is marginal costing?
using:
sales revenue
- variable costs
= contribution
- fixed costs
= profit
costing methods
why is marginal costing useful?
- notes contribution: positive contribution is worthwhile
- how to use resources to maximise profit
costing methods
what is absorption costing?
shares the overhead costs between products, to calculate the total cost
costing methods
what classification/grouping does absorption costing use?
direct and indirect costs
costing methods
how do you calculate prime cost in absorption costing?
direct materials
+ direct labour
+ direct expenses
= prime cost
(directly associated with making product)
costing methods
what are indirect costs in absorption costing?
- variable production overheads
- fixed production overheads
(not directly associated with the product made)
costing methods
what basis’ can be used to share overheads in absorption costing?
- labour hours
- machine hours
costing methods
what is the formula for overhead absorption rate (OAR)?
total overhead / total number of chosen basis
THEN
OAR / basis per hour or unit
costing methods
what are benefits of ABC?
- selling prices can be set with confidence
- better desicions can be made
costing methods
what are limitations of ABC?
- hard to set up, and determine cost drivers
- time consuming to set up
- difficult for non-financial managers to understand
costing methods
what is a cost driver?
activity that results in overhead costs being incurred
costing methods
which method is most useful for decision making?
marginal costing
(contribution is useful)
costing methods
which method is the best for giving information regarding the cost of the product?
activity based costing
(more accurate, as overheads are allocated and included in each of the product costs)
costing methods
which method is best for pricing decisions?
activity based costing
(gives accurate prices)
costing methods
which methods are acceptable for valuing inventory?
- ABC (activity based costing)
- absorption costing
costing methods
what is a cost centre?
section of the business where costs are collected
costing methods
what are the two types of cost centres?
- production cost centre
- service cost centre
costing methods
what are the stages of overhead absorption?
- allocation
- stage 1 apportionment
- stage 2 apportionment
- absorption
costing methods
what is allocation?
cost of an item is assigned to one cost centre, where the cost was incurred
costing methods
TRUE OR FALSE: all costs can be allocated
FALSE
(some may have to be shared amongst cost centres)
costing methods
what is apportionment?
sharing out
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financial ratios, accouning concepts, and inventory valuation29
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general accounting54
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incomplete records23
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accounting for limited companies37
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partnership accounting36
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trial balance and errors27
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cash book & bank reconciliation statements12
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books of prime entry & control accounts29
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business organisations & sources of finance30
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limited companies24
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budgeting and variance17
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marginal costing19
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standard costing & variance analysis36
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capital investment appraisal13
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formal 414
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costing methods27
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ethics35
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statement of cashflows17
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decision making15
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interpretation of accounting information23
