Who are the users of financial accounting and what is the purpose, law, format/style, scope, information use?
- Users: External
- Purpose: Record historical financial performance and position
- Law: Required by statute (CA 06)
- Format/style: Prescribed by CA 06/GAAP/IFRS
- Scope: Historical, cover business as a whole, minimum detail
- Information: Mostly financial
Who are the users of management accounting and what is the purpose, law, format/style, scope, information use?
- Users: Internal
- Purpose: Assist management in planning and controlling the business to make effective decisions
- Law: No legal requirements
- Format/style: Management discretion
- Scope: Flexible, includes historical current and future information which can focus on segments of the business
- Information: Financial and non-financial key performance indicators
What is a cost object?
Anything for which costs are determined
What is a cost centre?
A department, process or function where costs can be accumulated
What is a cost unit?
A product or service for which costs are determined?
What is a composite cost unit?
A cost unit made up of two parts
What is a standard cost card?
Shows the expected input resource usage and costs per unit
How do you calculate the absorption costing profit?
Marginal costing profit X
Plus (closing inventory - opening inventory) x OAR X/(X)
—-
Absorption costing profit X
What is FIFO?
First in, first out
Materials are issued out of inventory in the order in which they were delivered
What is LIFO?
Last in, first out
Materials are issued out of inventory in the reverse order to which they were delivered
What is cumulative weighted average?
- All inventory and issues are valued at an average price
- The average price is recalculated after each receipt (purchase)
- Cumulative weighted average price =
Running total of costs/running total of units
What is the periodic weighted average?
- Each issue is valued at the same average price
- Periodic weighted average price =
Total costs for the period/total units for the period
In times of RISING prices, what produces the highest and lowest closing inventory value?
In times of rising prices:
- Highest closing inventory value = FIFO
- Lowest closing inventory value = LIFO
In times of RISING prices, what produces the highest and lowest value of issues?
In times of rising prices:
- Highest value of issues: LIFO
- Lowest value of issues: FIFO
In times of RISING prices, what produces the highest and lowest profit?
In times of rising prices:
- Highest profit: FIFO
- Lowest profit: LIFO
In times of DECREASING prices,what produces the highest and lowest closing inventory value?
In times of decreasing prices:
- Highest closing inventory value: LIFO
- Lowest closing inventory value: FIFO
In times of DECREASING prices,what produces the highest and lowest value of issues?
In times of decreasing prices:
- Highest value of issues: FIFO
- Lowest value of issues: LIFO
In times of DECREASING prices,what produces the highest and lowest profit?
In times of decreasing profit:
- Highest profit: LIFO
- Lowest profit: FIFO
What do absorption costs include?
Absorption cost includes a ‘fair’ share of fixed production overheads in inventory valuation
What is Step 1 in the traditional approach to calculating unit costs?
Step 1 - Overhead allocation and apportionment
- Overheads which solely arise in a department are allocated (given) in total to that cost centre
- Overheads that are factory wide are apportioned (shared) between cost centres on a fair basis (e.g. floor area or number of employees)
What is Step 2 in the traditional approach to calculating unit costs?
Step 2: overhead reapportionment
- Overheads which have been allocated and apportioned to service departments are reapportioned to the production departments on a fair basis (e.g. time spent)
What is Step 3 in the traditional approach to calculating unit costs?
- Each production department’s total overheads are absorbed into cost units on an appropriate basis for that department by calculating an Overhead Absorption Rate (OAR)
- OAR = Budgeted overhead cost/budgeted measure of activity
The measure of activity could be prime cost, direct labour hours, labour hours
or machine hours.
OAR’s are based on budgeted data therefore differences to the actual
overhead costs and measure of activity will lead to absorption of a different
amount of overheads to what was actually incurred.
£
Actual overhead incurred X
Overhead absorbed (actual activity × OAR) (X)
–––
Under / (over) absorbed overheads X/(X)
How do you carry out activity based costing (ABC)?
Step 1
Identify a business’s major activities
Step 2
Identify cost drivers (factors causing activity costs to be incurred)
Step 3
Collect activity costs into cost pools
Step 4
Calculate an activity absorption rate and absorb into cost units.
What are the different costing methods and what are they appropriate for?
Job costing is appropriate for specific one-off jobs.
Contract costing is appropriate for specific big jobs.
Batch costing is appropriate for identical items.
Process costing is appropriate for a continuous production process.
Life cycle costing tracks costs and revenues over the products entire life cycle.
Target costing deducts the required profit from the price customers will pay to
generate the target cost.
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Summary Notes25
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The fundamentals of costing23
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Calculating Unit Costs (Part 1)23
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Calculating unit costs (Part 2)36
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Marginal costing and absorption costing20
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Pricing Calculations29
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Budgeting68
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Working Capital46
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Performance Management30
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Standard Costing and Variance Analysis30
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Breakeven analysis and limiting factor analysis15
