What is absorption costing?
The fixed overheads will be included in the unit cost
The profit is affected by inventory levels
Required for fianancial reporting
Can hide inefficiencies when production exceeds sales
What is marginal costing?
Fixed costs are treated as period costs
Contribution used for decision making
Profit based on sales volume
Provides clearer information for short term decision making
What is a good comparison sentence for absorption vs marginal costing?
Marginal costing provides better cost control information, while absorption costing is required for financial reporting.
What does overabsorption of overheads mean?
The overheads absorbed are larger than the actual overheads.
What does under absorption mean of overheads?
The overheads absorbed is larger than the actual.
What are the causes of over or under absorption?
Inaccurate overheads estimates
Changes in activity levels
Inefficient operations
What is Activity based costing?
This allocates the overheads using cost drivers
Improves cost accuracy
Why does ABC aid control?
Identifies high-cost activities
Reduces cross subsidisation
Improves pricing decisions
Highlights non value adding activities
What are the comparisons between traditional costing vs ABC?
Traditional costing has a single overhead rate whereas ABC has multiple cost drivers.
ABC is more complex where’s traditional is more simple. This also means ABC is more accurate than traditional. Because of this ABC has better control, with limited control for traditional costing.
What is cost control?
Keeps courts within the budgets and monitors the variances.
What is cost reduction?
Cost reduction permanently lowers cost levels
Improving efficiency
What are the behavioural aspects for costing systems?
Cost information can influence manager behaviour
Poor costing systems may encourage inefficiency
ABC improves accountability
How do you structure a task 4 answer?
- Identify the costing system
- Brief explanation
- How it aids control
- Limitation
- Short conclusion
What is value analysis?
Value analysis is a systematic review of product components and activities to reduce. OST without reducing customer value or quality.
Why is value analysis used?
This is used when there is a cost gap so when production cost is greater than the target cost. So management would need tor deuce cost before production.
How does value analysis work?
Break the production into components or activities
Identify the function of each component
Assess weather the cost adds value to the customer
Remove redesign or simply non value adding elements
LINK WITH TARGET COSTING
What might examples of value analysis?
Replace material with a cheaper alternative
Simplify the design
Reduce unnecessary features
What are the advantages of value analysis?
Reduces costs without reducing quality
Improves product design efficiency
Supports target costing
Enhances customer value
What are the disadvantages of value analysis?
Time consuming
Requires cross functional teams
Risk of quality reduction if poorly managed
What is standard costing
These are predetermined costs for materials,labour and overheads. Which are then compared with the actual results to give use variances.
Why does standard costing aid cost control?
Variances highlight inefficiencies
Management can investigate causes
Corrective action can be taken
Can motivate staff if standards are realistic
What is life cycle costing?
Life cycle costing considers all costs over products entire life not just production. Such as design,production, marketing after sales and disposal.
Why does life cycle costing aid cost control?
Most costs are committed at the design stage
Encourages long term decision making
Prevents short term cost focus
What is Kaizen costing?
Kaizen costing focuses on continuous incremental cost recursion during production phase.
