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A Level Accounting
Absorption and Activity Based Costing
| Question | Answer | |||
|---|---|---|---|---|
| What is the formula for Cost per Unit using Activity Based Costing ? | Cost pool/Cost Driver | |||
| What is a Cost Pool ? | Total Machine set up costs or Total Quality Inspection Costs or Total Quality Control procedure costs | |||
| What is a Cost Driver ? | Total Number of machine set ups or Total Inspection hours or Total Batches produced or Total Quality Control Procedures | |||
| What is the procedure for Activity Based Costing? | (1) Find the Cost pool (2) Find the Cost Driver (3) Cost Pool/Cost Driver = Cost Per Unit (4) Cost Per Unit x Total Number of machine set ups or Total Inspection hours or Total Batches produced for an Individual Product | |||
| State three advantages of Activity Based Costing | (1) Recognises that overhead costs are not all related to production (2) It can be applied to all overhead costs , not just production overheads. (3) Distribution of overhead costs is done on the basis of activities this is more realistic. | |||
| State three disadvantages of Activity Based Costing | (1) Wrong selection of cost drivers would nullify the benefits of ABC. (2) It is impossible to allocate all overhead costs to specific activities. (3) Collection and preparation of data is time-consuming. | |||
| How is Total Production Cost per unit calculated using Absorption Costing ? | (1) Calculate Fixed Costs per unit (Fixed Costs/Number of Units) (2) Fixed Costs per unit + Marginal Costs per unit | |||
| What is the formula for Marginal Costs ? | Direct Labour + Direct Materials + Variable expenses | |||
| State the difference between Absorption Costing and Activity Based Costing | For Activity Based Costing the overheads of the business are attributed to output on the basis of activities For Absorption Based Costing the total costs of the whole business are absorbed amongst all of the cost units. | |||
| Define a Cost Centre | Cost centre is any department in a business to which costs may be attributed | |||
| State using an example what a Production Cost Centre is | These are departments that are directly involved in the production process In a car factory the physical cars being built will flow through the assembly department and painting department | |||
| State using an example what a Service Cost Centre is | These are departments that physical units of production do not flow through as they are not directly involved in the production process but exist to serve other departments e.g. Canteen | |||
| Describe using an example what Cost Allocation is | Cost Allocation is the process by which cost items are charged directly to a cost unit or cost centre . Salary of stores clerk can be allocated to stores department | |||
| Explain Cost Apportionment with an example | Some overheads will relate to several cost centres They need to be apportioned between each costs centre For example, the rent of a factory relates to all departments that share the factory building and these costs may be apportioned based on floor space. | |||
| Explain why Service Departments Cost must be re-apportioned. | Service departments do not have cost units to which overheads can be charged. So, Service department costs must be reapportioned to relevant production departments | |||
| State two ways that Service Department costs are re-apportioned | (1) Direct Apportionment - Where Service Departments provide services to production departments only (2) Step Down Apportionment - Where Service Departments provide services to production departments and to some other service departments | |||
| What is the formula for apportionment ? | (Total cost / Total quantity) x Quantity related to cost centre | |||
| What is the formula for the Overhead Absorption Rate (OAR) ? | Total Budgeted Overheads/Total Budgeted Activity Level | |||
| What is the formula for Absorption Costing ? | Revenue – Prime Costs (Cost directly related to production e.g. direct materials and direct labour ) – Fixed Costs = Profit | |||
| List two disadvantages of using Absorption Costing | (1) Absorption costing relies on estimations e.g. to calculate OAR. These estimations may be inaccurate (2) New Technology has led to a reduction in the use of labour hours as a valid basis for absorption costing, yet it is still used | |||
| What procedure would you follow to answer the following question " Calculate the OAR for each department and state the basis of the OAR used" ? | Procedure = (1) Allocate Overheads (2) Apportion Overheads(re-apportion if required) (3) Add up Overheads and then divide by either Labour or machine hours depending on which is higher (To get OAR per department) | |||
| What procedure would you follow to answer the following question " Find the Costs per unit using Absorption Costing"? | Procedure = Fixed Costs per unit (Fixed costs/number of units) + Marginal Costs per unit | |||
| What procedure would you follow to answer the following question " Calculate the Overhead Absorption Rate per (Labour/Machine) hour"? | Procedure = Budgeted Overheads/ Budgeted Activity Level | |||
| Explain the advantages of a costing method that is focussed on the cause of a cost | Avoids apportioning overheads using a basis that is not relevant e.g. using machine hours for administration costs | |||
| Explain two limitations of using Absorption Costing as a method of calculating the selling price | (1) All figures are estimated leading therefore it could lead to an over or under absorption in the selling price | (2) The basis used to calculate the OAR may not be relevant for all the overheads in the production department leading to an inaccurate selling price | ||
| Explain two disadvantages of using Absorption Costing as opposed to Marginal Costing | Estimation - Absorption costing relies on using future estimated figures for activity and overhead cost to calculate an overhead absorption rate. These figures may be inaccurate separated | Accuracy - The apportionment of overheads may be inaccurate due to the bases used e.g. floor area Decision Making | ||
| Explain the procedure to Allocate and/or Apportion costs then do Absorption Costing using Machine or Labour Hours | Step1 (Allocate Direct Costs) Allocate costs that can be directly related to a particular department e.g. maintenance department repairs can be directly allocated to the maintenance department | Step2 (Apportion Remaining Costs) Apportion remaining costs using a suitable apportionment method e.g. rent can be apportioned based on floor area Step3 (Total off the costs for each department) | Step4 (Step Down Costs between Service departments and Production departments) Where a service department deals with a service department and production department the costs need to be stepped down to the service department and production departments | Step5 (Step down costs to Production department) Stepdown costs when a service department deals with just Production departments Step6 (Total off the costs for each Production department) hours to get the OAR |
| Define Prime Costs | Cost directly related to production e.g. direct materials and direct labour |
Created by:
durquhart1
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