Unit 3 - Absorption Costing Cartes | Quizlet

What is full cost?

The total amount of resources, usually measured in monetary terms, sacrificed to achieve a given objective

What is the logic of full costing?

The entire cost of running a facility must be regarded as part of the cost of the output that it helps to generate

What is a cost unit?

A unit of whatever is having its cost determined - usually it is one output of a particular product or service

What are the uses of full cost by managers?

Pricing & output decisions, exercising control, assessing relative efficiency & assessing performance

What is the simplest case for determining the full cost per unit?

Businesses that produce a single product or service

What is process costing?

Adding up all the elements of the cost of production for a product in a particular period, then dividing the total by the total number of units of output for that period

Issues with process costing (1)

When measuring certain elements of manufacturing cost

Issues with process costing (2)

The cost of raw materials (is it only 'relevant')

Issues with process costing (3)

We might know how much more output will be produced at different times (how many are partially completed by the end)

How to deal with not knowing how much output will be produced by the end of a period of time (due to partially completed output)

Calculate the equivalent units of output

What are the equivalent units of output?

The number of completed output that could have been produced given the material cost and manufacturing costs incurred

How to calculate the equivalent units of output

Estimate a percentage of how much is completed (based on materials, labour & other costs), then multiply this percentage by the partially completed output

What is the absorption costing method to determine the full cost per output for multi-product businesses?

Use job costing

What are direct costs?

Costs that can be identified with specific cost units - it can be measured reliably to a particular cost unit

Examples of direct costs

Wages & materials used

What are indirect costs (or overheads)?

All the other elements of total costs - that can't be identified with a particular cost unit

The first type of production cost

Manufacturing (production) indirect costs, which relate to the area where the product is produced

Examples of manufacturing (production) indirect costs

Rent for the factory, electricity bills, repairs to machines

The second type of production cost

Non-manufacturing (non-production) indirect costs, which relate to all other areas in the organisation

Examples of non-manufacturing (non-production costs)

Costs associated with selling the product, costs of finance, HR & admin teams

How does job costing work?

Identify the direct cost of each unit, then 'charge' each cost unit with a suitable share of the indirect cost (overheads)

What is the total cost (or full cost)?

The sum of the cost that remains the same irrespective of the level of activity

How to calculate the total cost (or full cost)?

Fixed costs + Variable costs

What are fixed & variable costs defined by?

The face of changes in the volume or activity

What are direct & indirect costs defined by?

The measure of the particular cost of units (jobs)

How do indirect costs (overheads) apply to services?

Absorption costing, but the service isn't identical, so looking at a different factor (such as time spent on a legal case)

When selecting a basis for charging overheads

Go for which one is the highest out of labour hours or machine hours

Examples of the basis for charging overheads

Direct labour hours or machine hours

Why is it irrational to prefer one basis of charging overheads to jobs simply because of different apportions to a particular job?

The total overheads are the same irrespective of the method charging to total to individual jobs

In what situation would it not it be irrational to charge overheads to a particular job?

Where a customer has agreed to pay a price for a particular job based on full cost plus an agreed percentage for profit (these are often called cost-plus pricing contracts)

What is segmenting overheads?

Charging one segment of the total overheads on one basis and another segment on another basis

What are cost centres?

Where cost determination is dealt with departmentally

What are product cost centres?

Jobs are worked on by direct workers and/or where direct materials are added

What are service cost centres?

The cost of service cost centres must be charged to product cost centres and become part of the product cost centres' overheads, so those overheads can be charged to jobs

What is cost allocation?

Allocate indirect cost elements that are specific to particular cost centres

What is cost apportionment?

Allocate the more general overheads to cost centres, these are overheads that relate to more than one cost centre

What is batch costing?

Costing used when goods/services are produced in a batch of identical, or nearly identical, units of output

How to carry out batch costing

The full cost on a job-costing basis / The number of cost units (products) on the batch = The full cost of one cost unit (a product)

Absorption costing - step 1

Draw a table that shows the departments and the service departments plus a total column

Absorption costing - step 2

Type in the indirect manufacturing costs for each of the departments

Absorption costing - step 3

Type into the total column overheads for product cost centres

Absorption costing - step 4

Allocate each product cost centre cost using a linked base across them

Absorption costing - step 5

Apportion the total of the service cost centres across the product cost centres

Absorption costing - step 6

Add up the columns for each cost centre. This represents the overhead that needs charging (recovering from) to the products that are made in that cost centre during the period of time

Absorption costing - step 7

Calculate the overhead recovery rate for each product cost centre using your preferred method for each cost centre

How to calculate direct material cost

Direct material cost = Amount of material used x Cost per amount used

How to calculate direct labour cost

Period of time x Labour cost per period

How to calculate department overhead

Period of time x Recovery rate per period

How to calculate prime cost

Direct material costs + Direct labour costs

How to calculate production cost

The sum of all the department overheads + Prime cost