Costing: Marginal, Standard, Absorption, ABC

What are fixed costs?
Costs that don't change when the level of output or activity changes
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What are stepped fixed costs?
When a certian level of activity causes a sudden rise in costs such as buying a renting a new factory.
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What are semi-variable costs?
Costs that are made up of both a fixed and variable element.
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What are variable costs?
When cost varies in proportion to the level of output or activity.
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What are dierct costs?
A cost that can be identified directly with each unit of output.
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What are indirect costs?
All costs other than direct costs and they cannot be identified with specific units of output.
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What is marginal costing?
The total variable cost of producing one extra unit of output.
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What is contribution?
Is the amount left to cover fixed costs after that anything else is profit.
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What is the formula for contribution?
Sales less Variable Costs
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How is profit calculated using marginal costing statement?
Sales less Variable Costs = Contribution less Fixed Costs equals Profit
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What are the benefits of a marginal costing statement?
Contribution is clearly identified, managers can focus on the contribution provided by output, the effect of cost changes on revenue can be calculated, helps with decision making.
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What are cost units?
Units of output to which costs can be charged
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What are cost centres?
Sections of a business to which costs can be charged.
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How is the absorption cost calculated?
Direct materials + Direct labour + Direct expenses + Indirect overheads(fixed and variable) = Absorption cost
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What is activity based costing?
ABC charges overheads to output on the basis of activities
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What are cost drivers?
Activities that cause costs
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How is cost rate per activity calculated?
Cost pool / Cost driver
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What are the uses of marginal costing?
Helps with decision making such as costing a project, make or buy, acceptance of additional work, price setting, optimum use of scarce resources
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What are the uses of absorption costing?
Calculates profit, Calculates inventory valuation for the financial statements.
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What are the uses of activity based costing?
Identifies what causes overheads to be incurred for a particular activity.
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What are the advantages of marginal costing?
Contribution is easy to understand, Useful for decision making
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What are the limitations of marginal costing?
Costs have to be identified as fixed or variable, all overheads have to be recovered or a loss will be made, not acceptable under IAS 2, calculation of selling price may be less accurate than other costing methods.
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How does marginal costing work?
Costs are classified as either fixed or variable and contribution is calculated.
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What are the advantages of absorption costing?
Acceptable under IAS 2, Appropiate for traditional industries where overheads are charged to output on the basis of direct labour hours or machine hours.
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What are the limitations of absorption costing?
Not as useful in decision making as marginal costing, may provide less accurate basis for calculation of selling prices where overheads are high and complex in nature.
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How does absoption costing work?
Overheads are charged to output, often on the basis of direct labour hours or machine hours.
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What are the uses of activity based costing?
Identifies what causes overheads to be incurred for a particular activity.
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What are the advantages of acitivity based costing?
Acceptable under IAS 2, more accurate calculation of selling prices because overheads are considered. Appropiate for capital intensive industries with high and complex costs, identifies areas of inefficiency, Helps understand why costs are incurred.
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What are the limitations of activity based costing?
Time consuming to set up and record costs because of detail required, Selection of cost drivers can be difficult, Cost drivers and pools need to be kept up to date, Common costs such as rent and rates still need to be reovered.
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How does activity based costing work?
Cost drivers are identified, Overheads are charged to output on the basis of activities.
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What is the allocation of overheads?
It is the chargin of a particular cost centre of overheads that are incurred entirely by that cost centre
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What is the apportionment of overheads?
The sharing of overheads over a number of cost centres to which they relate. Each cost centre is chaged with a proportion of the overhead cost.
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What is the overhead absorption rate?
The rate at which the overheads are absorbed into the cost unit.
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What is the formula for overhead absorption rate?
department overheads / department direct machine hours or direct labour hours
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What is oppertunity cost?
The benefit that is foregone when a particular course of action is taken.
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What is cost plus pricing?
When cost price is added to profit to give selling price
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What is market led pricing?
When businesses set their prices in comparison to other suppliers to make their product more competitive.
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What is marginal cost/contribution pricing?
Shows the minimum price needed to be charged
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What needs to be considered when making a make or buy decsion/
How long we will need the product, Can we find a supplier to make the product, Is the suppliers product a high enough standard, being reliant on other businesses, what costs are involed,possible problems with supplier,what happens at end of contract
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What are the conditions of accepting additional work?
Products need to be sold above absorption cost, must be spare production capacity, Existing customers mustn't know price charged,mustn't be able to sell the items to existing customers at a lower price,must be positive contribution, must be a one off
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When migh a business accept additional work with a negative contribution?
The order will help retain skilled workers, helps maintain machinery, May stimulate future orders at full price, For aulturistic reasons- it is the right thing to do.
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What is standard costing?
Sets predetermined/budgeted cost for materials, labour and overheads in advance of production.
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What are the purposes of standard costing?
Assists budget setting and evaluating performance, acts as a control device by highlighting areas not perfroming as expected, Provides information on future costs for future decisions, Provides motivating targets,acceptable cost for valuing inventory
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What are the advantages of standard costing?
Predetermined forecasts make budget preperation easier, Costs+revenues controlled by variances highlighting inefficiencies, recording inventory simplified it is all at standard cost, Inernal+external reports can be produced, targets motivate workers.
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What are the limitations of standard costing?
Standards have little use if set too high or low so must be regularly reviewed, Best used for businesses with well established repetitive processes, Collecting info may be costly and time consuming, New tech may rapidly make information out of date.
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Other cards in this set

Card 2

Front

What are stepped fixed costs?

Back

When a certian level of activity causes a sudden rise in costs such as buying a renting a new factory.

Card 3

Front

What are semi-variable costs?

Back

Preview of the front of card 3

Card 4

Front

What are variable costs?

Back

Preview of the front of card 4

Card 5

Front

What are dierct costs?

Back

Preview of the front of card 5
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