Cost Behaviour and Cost Accounting Techniques

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Why is full cost important?
Selling prices / Charges - prices include overheads and indirect costs, if they're not included then prices will be set too low

Transparency - the organisation understands the full costs of services

IAS 2 - requires that inventory is recorded at full p
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Prime Cost
Prime cost is the total of the direct production cost
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Standard costing Advantages & Disadvantages
Advantages - accuracy of budgets is improved, cost consciousness is instilled, methods may be improved, better control analysis
Disadvantages - What is the acceptable standard? incorporating inflation, costly to introduce and maintain
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Absorption Costing
A costing method that expenses all costs associated with manufacturing a particular product. Uses total direct costs and overhead costs associated with manufacturing a product as the cost base.
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Under / Over Absorption
Under absorption occurs when the actual overhead incurred is greater than the overhead absorbed.

Over absorption occurs when the actual overhead is less than the overhead absorbed.
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Why traditional systems are inadequate today
- small product range
- most of the costs related to direct labour and materials
- a low proportion of non - volume related overheads

These changes have come about because of investment in technology &shorter product life
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Limitations of traditional absorption costing
- assumes products consume resources about volume measures (e.g.labour/machine hours)

- gives a distorted product cost where a diverse range of products with a mix of high and low volumes

-provides inadequate information for managers to make informed
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Similarities between absorption costing and ABC
- Both have direct costs which go to the products
- Both have overheads that are allocated to production
- ABC is a form of absorption costing whereby full costs are apportioned and absorbed into the products and services delivered
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differences between absorption costing and ABC
- absorption costing generally uses two bases to charge overheads to products (direct labour hours and machine hours)
-ABC uses cost drivers to absorb overhead
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Advantages of ABC
- more Accurate reflection of resources (overheads are not always volume related)

- better understanding of cost behaviour

- better decision
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Disadvantages of ABC
- Better, but not completely accurate

- How to identify the cost driver

-Quantification of the cost driver - can you put a number to it?

- Accuracy of the cost driver

- more expensive
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Marginal Costing
The cost of making an additional unit.
Under marginal costing, only variable costs are charged to cost units, while fixed costs are treated like period costs.
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Profit comparison between marginal and absorption costing
If production > sales then absorption costing will have a greater profit

If sales > production, then marginal costing will have a greater profit
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Other cards in this set

Card 2

Front

Prime Cost

Back

Prime cost is the total of the direct production cost

Card 3

Front

Standard costing Advantages & Disadvantages

Back

Preview of the front of card 3

Card 4

Front

Absorption Costing

Back

Preview of the front of card 4

Card 5

Front

Under / Over Absorption

Back

Preview of the front of card 5
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