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Absorption and marginal costing and activity based costing
Prepared by ou dai
1
Assumed knowledge for costing method
Cost classification Cost behavior Overhead allocation, apportionment, reapportionment Material cost Labor cost
10
Key points
It’s important to appreciate the possible implications that a chosen costing approach may have on profit reporting, product pricing,performance evaluation, and decision – making
14
Marginal costing
It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost The marginal cost of a product –“ is its variable cost”. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads.
15
Βιβλιοθήκη Baidu
Marginal costing
High low method Exercise 4
output( units) 200 total cost($) 7,000
Month 1
2 3
a)
b)
c)
300 8,000 400 9,000 Find the variable cosst per unit Find the total fixed cost per month Estimate the total cost if output is 250 units in a month
12
OAR
Overhead absorption rate is achieved by means of a predetermned overhead absorption rate.
OAR = Budgeted overheads Budgeted level of activity
Departmental
16
Contribution
Marginal costing technique has given birth to a very useful concept of contribution where contribution is given by: Sales revenue less variable cost (marginal cost) Contribution may be defined as the profit before the recovery of fixed costs. Thus, contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus profit (C = F + P).
You are required to calculate the cost per unit using
a. b. c.
Individual departmental overhead absorption rates, based on labour hours A blanket overhead absorption rate, based on labour Which is more appropriate? What are the alternatives?
A B C A+B+C D A+B+C+D E F A+B+C+D+E+F
9
Review
In absorption costing, overhead costs will be added to each unit of product manufactured and sold Sometimes, but not always, the overhead costs of administration, selling and distribution are also added to unit costs, to obtain a full cost of sales See your manual page 161 The difference of factory COS and full COS
17
Contribution
In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed cost (C = F). this is known as break even point. The concept of contribution is very useful in marginal costing. It has a fixed relation with sales. The proportion of contribution to sales is known as P/V ratio which remains the same under given conditions of production and sales.
2
Introduction
Two main costing method for stock valuation in manufacturing business,effect on Balance Sheet and Income Statement Before we allocate all manufacturing costs to products regardless of whether they are fixed or variable. This approach is known as absorption costing/full costing However, only variable costs are relevant to decision-making. This is known as marginal costing/variable costing
The labour rate is $6 per hour in each department. The budgeted departmental overheads are: Department X Department Y Department Z $55,000 $27,000 $200,000
Overhead cost clssification
7
Overhead analysis
Production overhead ( manufacturing overhead) Administration overhead Selling and distribution overhead R&D overhead
vs blanket
13
Exercise 1
A company makes 2 products in 3 departments. Relevant product information is: Product A Direct material cost $15 Direct labour cost in Department X $12 Direct labour cost in Department Y $15 Direct labour cost in Department Z $6 Budgeted number of units 10,000 Product B $25 $18 $15 $0 8,000
These overheads are usually treated as period costs and written off against profit in the period they arise
8
Review
Full cost of sales In costing a small product made by a manufacturing organisation, direct costs are usually restricted to some of the production costs. A commonly found build-up of costs is therefore as follows: $ Production costs Direct materials Direct wages Direct expenses Prime cost Production overheads Full factory cost( product) Administration costs Selling and distribution costs Full cost of sales
Different costing methods produce different measurements of profit
11
Key points
Overheads are allocated/apportioned to cost centres using any” reasonable basis”. Costs accumulated in service cost centres are then re-apportioned to production cost centres. The total costs in these are finally absorbed into cost units using an appropriate absorption rate
6
Overhead analysis
Costs are calssified as direct and indirect (overheads). Overheads are not directly attributable to cost units, so they need to be shared out so that each cost unit is charged with appropraite share of overheads. The reason?
3
Reason?
The costs that vary with a decision should only be included in decision analysis. For many decisions that involve relatively small variations from existing practice and/or are for relatively limited periods of time, fixed costs are not relevant to the decision This is because either fixed costs tend to be impossible to alter in the short term or managers are reluctant to alter them in the short term.
4
Definition
Absorption costing Marginal costing
5
Absorption costing
It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs
Prepared by ou dai
1
Assumed knowledge for costing method
Cost classification Cost behavior Overhead allocation, apportionment, reapportionment Material cost Labor cost
10
Key points
It’s important to appreciate the possible implications that a chosen costing approach may have on profit reporting, product pricing,performance evaluation, and decision – making
14
Marginal costing
It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost The marginal cost of a product –“ is its variable cost”. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads.
15
Βιβλιοθήκη Baidu
Marginal costing
High low method Exercise 4
output( units) 200 total cost($) 7,000
Month 1
2 3
a)
b)
c)
300 8,000 400 9,000 Find the variable cosst per unit Find the total fixed cost per month Estimate the total cost if output is 250 units in a month
12
OAR
Overhead absorption rate is achieved by means of a predetermned overhead absorption rate.
OAR = Budgeted overheads Budgeted level of activity
Departmental
16
Contribution
Marginal costing technique has given birth to a very useful concept of contribution where contribution is given by: Sales revenue less variable cost (marginal cost) Contribution may be defined as the profit before the recovery of fixed costs. Thus, contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus profit (C = F + P).
You are required to calculate the cost per unit using
a. b. c.
Individual departmental overhead absorption rates, based on labour hours A blanket overhead absorption rate, based on labour Which is more appropriate? What are the alternatives?
A B C A+B+C D A+B+C+D E F A+B+C+D+E+F
9
Review
In absorption costing, overhead costs will be added to each unit of product manufactured and sold Sometimes, but not always, the overhead costs of administration, selling and distribution are also added to unit costs, to obtain a full cost of sales See your manual page 161 The difference of factory COS and full COS
17
Contribution
In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed cost (C = F). this is known as break even point. The concept of contribution is very useful in marginal costing. It has a fixed relation with sales. The proportion of contribution to sales is known as P/V ratio which remains the same under given conditions of production and sales.
2
Introduction
Two main costing method for stock valuation in manufacturing business,effect on Balance Sheet and Income Statement Before we allocate all manufacturing costs to products regardless of whether they are fixed or variable. This approach is known as absorption costing/full costing However, only variable costs are relevant to decision-making. This is known as marginal costing/variable costing
The labour rate is $6 per hour in each department. The budgeted departmental overheads are: Department X Department Y Department Z $55,000 $27,000 $200,000
Overhead cost clssification
7
Overhead analysis
Production overhead ( manufacturing overhead) Administration overhead Selling and distribution overhead R&D overhead
vs blanket
13
Exercise 1
A company makes 2 products in 3 departments. Relevant product information is: Product A Direct material cost $15 Direct labour cost in Department X $12 Direct labour cost in Department Y $15 Direct labour cost in Department Z $6 Budgeted number of units 10,000 Product B $25 $18 $15 $0 8,000
These overheads are usually treated as period costs and written off against profit in the period they arise
8
Review
Full cost of sales In costing a small product made by a manufacturing organisation, direct costs are usually restricted to some of the production costs. A commonly found build-up of costs is therefore as follows: $ Production costs Direct materials Direct wages Direct expenses Prime cost Production overheads Full factory cost( product) Administration costs Selling and distribution costs Full cost of sales
Different costing methods produce different measurements of profit
11
Key points
Overheads are allocated/apportioned to cost centres using any” reasonable basis”. Costs accumulated in service cost centres are then re-apportioned to production cost centres. The total costs in these are finally absorbed into cost units using an appropriate absorption rate
6
Overhead analysis
Costs are calssified as direct and indirect (overheads). Overheads are not directly attributable to cost units, so they need to be shared out so that each cost unit is charged with appropraite share of overheads. The reason?
3
Reason?
The costs that vary with a decision should only be included in decision analysis. For many decisions that involve relatively small variations from existing practice and/or are for relatively limited periods of time, fixed costs are not relevant to the decision This is because either fixed costs tend to be impossible to alter in the short term or managers are reluctant to alter them in the short term.
4
Definition
Absorption costing Marginal costing
5
Absorption costing
It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs