Flashcards
Absorption Costing - Flashcards
Flashcards do conjunto (15)
- 1Absorption Costing ObjectiveTo include in the total cost of a product an appropriate share of the organisation’s total overheads
Appropriate share means an amount which reflects the amount of time and effort that has gone into producing a unit or completing a job - 2Theoretical justificationThe theoretical justification for absorption costing its that all production overheads are incurred in the production of the organisation’s output and so each unit of the product receives some benefit from these costs. Each unit of output should therefore be charged with some of the overhead costs
- 3Factory cost of salesFactory cost of sales is the prime cost + the production overheads
- 4Full cost of salesPrime cost + production overheads + all other overheads
- 5Main Reasons for absorption costingInventory Valuations, Pricing decisions, and establishing the profitability of different products
- 6Inventory ValuationsInventory on hand must be valued because of;
1. the closing inventory figure in the financial statements
2. cost of sales figure
Cost of sales is calculated by taking the opening inventory balance, subtracting the closing inventory balance, and the balance will give you COGS
Therefore the closing balance must be represented accurately as it directly relates to financial positions - 7Pricing DecisionsAbsorption costing and finding accurate costs per unit is vital to setting a profitable sales price for a product. Some companies will use the factory cost of sales to set a fixed profit margin/ percentage and base their individual quotes per job on this percentage.
- 8Establishing profitability of different productsIf a company sell more than one product it will be difficult to judge how profitable each individual product is, unless overhead costs are shared on a fair basis between each product
- 9Absorption costing & IAS 2Absorption costing is the recommended costing method in financial accounting which is governed by the International Accounting Standards 2 (IAS 2).
- 10IAS 2States that costs of all inventories should comprise those costs which have been incurred in the normal course of business, bringing the inventories to their ‘present location and condition’
In financial accounting, closing inventories should be valued at the full factory cost and therefore it is more appropriate to value inventories in the same way in cost accounting - 11Cost centresOverhead allocation happens when a cost is allocated to a specific department based on the use of the cost
Split into production department, service department (for things such as QC), administrative department, marketing and distribution, and overhead cost centre (where costs of shared expenses such as rent, electricity, etc goes) - 12ApportionmentProcedure where indirect costs are spread daily between cost centres
- 13Apportion General OverheadsApportion overheads based on separate basis
Rent, rates, heating, lighting, repairs and depreciation of building = floor area
Depreciation of equipment, insurance of equipment = cost of book value of equipment
Personnel costs, cafeteria costs, superannuation = no. of employees or hours worked - 14Apportion methodFind the percentage of the departments unit based on the total unit e.g. percentage of floor space used by department A out of the whole floor space, then use this percentage to multiply it by the total cost for that category
e.g. Gas and electricity total was $19 200
Department A floor space - 6000
Total floor space - 15 000
Percentage of floor space = 40%
40% x 19 200 = $7680 of gas and electricity apportioned to Department A - 15Apportion Service Department CostsStores = number of cost value of material requisitions
Maintenance = hours of maintenance work done for each cost centre
Production planning = direct labour hours worked in each production cost centre
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- CPA Management Accounting FlashCards sobre Absorption Costing - Flashcards, criado por Juliet Froes em 21-08-2024.
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