Costing Differences in Accounting

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Questions and Answers

Calculate the over-absorption of fixed overhead when actual production is 60000 units and normal production is 52000 units.

$32000

What is the under-absorption of fixed overhead when actual production falls to 48000 units while normal production is 52000 units?

$16000

In which period did profit under Absorption costing exceed that of Marginal costing by $48000, and why?

Period 2; due to fixed costs of 12000 units carried forward.

Explain the profit difference in Period 3 between Absorption costing and Marginal costing.

Absorption costing showed a loss of $32000 due to higher opening stock than closing stock. Signup and view all the answers

What was the reason for the profit under Absorption costing being less than Marginal costing by $16000 in Period 4?

The fixed overhead related to opening stock was charged to the current year's production. Signup and view all the answers

How does the allocation of fixed costs differ between absorption costing and marginal costing?

Under absorption costing, fixed costs are allocated to the cost of production, whereas in marginal costing, fixed costs are treated as period costs, affecting profitability differently. Signup and view all the answers

What is the impact of closing stock on profits when comparing absorption costing and marginal costing?

When closing stock is greater than opening stock, absorption costing shows higher profits as some fixed overheads are deferred to future periods. Signup and view all the answers

Explain how opening and closing stock affect unit costs under absorption costing.

Under absorption costing, unit costs are influenced by the amount of opening and closing stock due to the allocation of fixed overheads. Signup and view all the answers

Why might profit under absorption costing be lower than under marginal costing?

Profit under absorption costing may be lower when closing stock is less than opening stock, as some fixed costs from the previous period are charged to the current period. Signup and view all the answers

What conditions ensure that profit results under absorption and marginal costing are the same?

The profit results will be the same when production coincides with sales, meaning there are no opening or closing stocks. Signup and view all the answers

Define under-absorbed fixed overheads in the context of absorption costing.

Under-absorbed fixed overheads occur when the actual level of activity is less than the normal level, resulting in a difference in fixed overhead allocation. Signup and view all the answers

How does marginal costing present data differently in terms of contributions?

Marginal costing focuses on highlighting total contribution and contributions from each product, contrasting with the conventional presentation in absorption costing. Signup and view all the answers

What needs to be adjusted when reconciling results between absorption costing and marginal costing?

Adjustments for under-absorbed and over-absorbed overheads must be made when reconciling the results of both costing methods. Signup and view all the answers

What is a primary characteristic of costs in the service sector compared to manufacturing?

Costs in the service sector are often labour intensive with minimal or no direct material costs. Signup and view all the answers

Explain why defining cost units in the service sector is challenging.

Defining cost units in the service sector is challenging due to the intangible nature of services, making it difficult to identify clear units of measurement. Signup and view all the answers

Provide a suitable cost unit for a hotel.

The appropriate cost unit for a hotel is bed nights available or occupied. Signup and view all the answers

What are the two methods typically used in service costing?

The two common methods in service costing are job costing and process costing. Signup and view all the answers

Give an example of a service sector that utilizes the job costing method.

An example of a service sector using job costing is an accounting firm. Signup and view all the answers

What is a hybrid method in service costing?

The hybrid method in service costing is a combination of job costing and process costing. Signup and view all the answers

Identify a suitable cost unit for a school.

A suitable cost unit for a school is student hours or the number of full-time students. Signup and view all the answers

What are the main cost components in the service sector?

The main cost components in the service sector are labour hours and service overheads. Signup and view all the answers

What does the contribution margin represent in relation to a company's fixed costs?

The contribution margin represents the amount of income available to cover fixed costs after deducting variable costs. Signup and view all the answers

How is the contribution margin ratio calculated?

The contribution margin ratio is calculated by dividing the contribution margin by total sales revenue. Signup and view all the answers

What assumptions are made in cost-volume-profit (CVP) analysis?

CVP analysis assumes that sales price per unit, variable costs per unit, and total fixed costs are constant. Signup and view all the answers

What is the significance of the break-even point?

The break-even point signifies the level of sales at which net income equals zero. Signup and view all the answers

In the context of this company, what is the contribution margin per unit?

The contribution margin per unit is calculated as $10 (sales price) - $6 (variable cost) = $4. Signup and view all the answers

If the total fixed costs are $40, what is the minimum sales needed to cover those costs assuming a contribution margin of $4 per unit?

To cover $40 in fixed costs with a $4 contribution margin per unit, the minimum sales needed is 10 units. Signup and view all the answers

Describe the relationship between variable costs and the contribution margin.

Variable costs reduce the contribution margin, as the contribution margin is derived from sales revenue minus variable costs. Signup and view all the answers

What happens to a company's income when sales exceed the break-even point?

When sales exceed the break-even point, every additional unit sold contributes directly to increasing net income. Signup and view all the answers

What is the primary purpose of a company's statement of operations?

To summarize a company's revenues and expenses over a reporting period. Signup and view all the answers

How can operating expenses impact a company's attractiveness to customers?

High operating expenses can lead to better service, which can make a company more attractive to customers. Signup and view all the answers

What is the basic equation of the statement of operations?

Revenues – Expenses = Net Income. Signup and view all the answers

Why might a bank choose to operate with higher expenses than its competitors?

To create shorter lines and a stronger community presence, leading to 'stickier' deposits. Signup and view all the answers

What key financial statements are used alongside the statement of operations?

The balance sheet and the cash flow statement. Signup and view all the answers

In what situation might operating expenses be too low for a company?

When they negatively affect the underlying business, potentially leading to liquidation. Signup and view all the answers

What can be inferred about a company's management from its approach to operating expenses?

It indicates their prioritization of expenditures that lead to higher returns on equity. Signup and view all the answers

What is net income and why is it important?

Net income is the amount left over after expenses are paid, and it's crucial for business sustainability. Signup and view all the answers

Why is customer profiling important in the service sector?

Customer profiling helps identify how different customers utilize services, enabling businesses to tailor their pricing based on the actual cost to serve each customer. Signup and view all the answers

What is customer costing and how can it benefit service industries?

Customer costing is a management approach focusing on customer satisfaction that helps in identifying the profitability of different customer segments, leading to better pricing strategies. Signup and view all the answers

Give an example of how customer costing applies in the banking sector.

In the banking sector, customer costing can analyze activities such as cheque processing and cash withdrawals, allowing banks to charge customers based on their specific usage patterns. Signup and view all the answers

What role does Activity-Based Costing (ABC) play in understanding customer profitability?

ABC helps identify the costs associated with specific customer activities, enabling companies to assess and enhance the profitability of their customer relationships. Signup and view all the answers

How can unit costs assist organizations in enhancing their operational efficiency?

Calculating unit costs allows organizations to evaluate their expenses related to producing services, thus highlighting areas where efficiency can be improved. Signup and view all the answers

Describe how service costing is utilized across various service organizations.

Service costing entails determining the total operating costs and costs per service, facilitating better pricing decisions and service efficiency in sectors like transportation and healthcare. Signup and view all the answers

Why might it become more economical for a business to hire full time employees instead of independent contractors?

When the service cost of employing independent contractors becomes too high, it may be more cost-effective for a business to hire full-time employees to perform the same tasks. Signup and view all the answers

What challenges arise when identifying support activities related to customers in the service sector?

Challenges include the difficulty in quantifying service outputs and associating common costs with specific customer activities, leading to complexities in accurate costing. Signup and view all the answers

Study Notes

Strategic Cost Management

This MBA module from Calicut University covers cost concepts, classifications, and techniques for separating costs.

Cost Concept

'Cost' is the monetary expenditure of a firm for production.
This includes: wages/salaries, machinery/equipment, materials, power, fuel, transportation, rent, and insurance.
Payments to the government (taxes) are also included.
Money costs represent the firm's outlays for production factors.
Other costs (e.g., opportunity cost) are also crucial for decision-making.
The scope of activities of a firm should be planned.
Important considerations in defining scope: production techniques, in-house vs. contract manufacturing, raw material sourcing, product specialisation, and business expansion.

Classification of Costs - Element Wise

Indirect material: items like Canteen food, first aid materials, fire extinguishing materials
Indirect labor: wages to factory supervisors, works manager, foremen
Indirect expenses: office & general expenses, repairs & maintenance, rent, rates, insurance, depreciation

Classification of Costs - Function Wise

Factory costs: Include costs for payment of wages to repair staff, maintenance staff, and store staff
Administration costs: Include expenses of general administration like depreciation.
Selling and distribution costs: Costs like market research & advertisement & showroom expenses.

Classification based on Cost Behavior

Fixed costs: Remain constant regardless of output level (e.g., rent, insurance).
Variable costs: Change proportionally with output level (e.g., materials, direct labor).
Semi-variable costs: Partly fixed and partly variable (e.g., some utilities).

Techniques for Separation of Costs

Analytical method
Simultaneous equations method
Least square method
Level of activity method
High-low method

Cost Classification by Functions / Activities

Production costs: all costs related to production of goods/services
Administration costs
Finance costs
Selling costs
Distribution costs
Research and development costs

Cost Sheet - Meaning

Cost sheet is a document showing detailed cost of a cost center or cost unit for a certain period.
It's a memorandum, not part of double-entry accounting.
Provides current cost comparison with historical costs.

Cost Sheet - Items Required

Raw Materials Stock: Opening, Purchases, Closing
Direct Labour
Direct Expenses
Works Overheads or Factory Overheads
Office and Administration Overheads
Selling, Distribution Overheads
Total Cost or Cost of Sales

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Description

This quiz explores the concepts of over-absorption and under-absorption of fixed overhead within absorption and marginal costing frameworks. Learn how production levels impact profit reporting and the reasons behind variances in profit between these costing methods. Test your understanding of how stock levels influence cost allocations and overall profitability.