Lecture 3 - AF1018

Prime Cost Formula

direct material + direct labor

Conversion Cost Formula

direct labor + manufacturing overhead

Full product/factory cost

All direct costs + all indirect costs

Cost card layout

Direct materials

Direct labour

Prime cost

Manufacturing overhead

Total manufacturing cost

Non-manufacturing overheads

Total cost

Variable Costs

Costs that vary based on activity levels/the level of production.

(Remains consistent per unit but not in total)

Fixed Costs

Costs that do not vary with the level of output/activity. (Fixed cost per unit goes down as activity level goes up)

Mixed Costs/Semi variable costs

Costs that have both fixed and variable components. These can be expressed with the equation Y = a + bX.

Job Costing

Used when different products are produced, products are made to order (job production), Costs can be traced to jobs & Cost records are maintained for each product or job.

Overhead Absorption Rate (OAR)

Estimated total manufacturing overhead cost for the coming period / estimated total units in the allocation base for the coming period

Overhead absorbed

OAR x actual activity

Under absorption

When actual overhead is higher than the budgeted OH.

Over-absorption

When the actual overhead is lower than the budgeted OH.