Costing Differences in Accounting

In absorption costing, fixed costs are assigned to each product's cost of production. Each product absorbs a share of the total fixed costs, affecting its profitability.

The difference between absorption costing and marginal costing lies in how fixed costs are treated.

Marginal costing presents data in a way that highlights the contribution margin for each product and the total contribution margin. This helps analyze profitability.

Absorption costing follows the conventional pattern of deducting fixed overheads from total costs to determine a product's net profit.

In marginal costing, the unit cost of production remains constant regardless of opening or closing stock levels. It only accounts for variable costs.

Under absorption costing, the unit cost of production is influenced by opening and closing stock levels because fixed costs are included in the cost of production.

The reconciliation of absorption costing and marginal costing profits requires adjusting for over-absorbed or under-absorbed overheads, which arise due to differences between actual and planned activity levels.

When production equals sales, there is no opening or closing stock, and profits under absorption costing and marginal costing will be the same.

The difference between actual production and normal production. It's the amount of fixed overhead that is either absorbed or under-absorbed.

This method treats all fixed manufacturing costs as product costs. The fixed overhead is allocated to units produced.

This method treats all fixed manufacturing costs as period costs. Fixed overhead is not included in product costs.

The difference in profit between Absorption Costing and Marginal Costing arises from the way fixed costs are treated. When there are changes in inventory levels, fixed costs assigned to units in inventory can impact profit calculations.

Fixed costs that are associated with units in inventory. This cost can either be charged to the current period or carried forward.

The amount of sales dollars available to cover fixed costs. It's calculated as the difference between sales revenue and total variable costs.

The percentage of sales dollars that contributes to covering fixed costs. It's calculated by dividing the contribution margin by total sales.

The level of sales where a company's net income is zero. In other words, the company is neither making a profit nor incurring a loss.

The assumption that the sales price of a product remains constant regardless of the sales volume.

The assumption that the variable cost per unit remains constant regardless of the production volume.

The assumption that the total fixed cost remains constant regardless of the production volume.

The assumption that all units produced are sold during the period.

The assumption that changes in sales volume are the sole driver of changes in costs.

The cost of providing a specific service is tracked individually. This is used in industries where services are unique and tailored to clients. For example, an accounting firm tracks costs for each client's project.

The cost of providing a service is calculated by averaging the cost of similar services. This is used in industries where services are standardized and provided to a large number of customers. For example, a bank tracks the average cost of processing a customer's transaction.

A combination of job costing and process costing methods. This allows for tracking specific service costs while also calculating average costs for larger volumes.

The most important cost drivers in the service sector. They represent the time spent delivering the service and the indirect costs associated with running the business.

A service sector characteristic where the activities are primarily performed by employees rather than relying heavily on material inputs.

Defining a specific unit of service measurement can be challenging in the service sector due to the intangible nature of the product compared to tangible goods.

The service sector's intangible nature makes it difficult to track inventories as in manufacturing. Costs are typically assigned directly to revenue periods.

Due to the direct human interaction in service delivery, service organizations must prioritize ethical and responsible practices to maintain customer trust.

Customer costing is a management approach focused on understanding and managing costs associated with individual customers, particularly in service industries.

In service industries, where outputs may be difficult to quantify, customer costing helps identify and allocate costs to specific customer groups.

Customer profitability analysis is crucial in customer costing, as it helps determine which customer segments are profitable and which are not.

Customer profiles can be built by analyzing the usage of services by different customer groups to develop a deeper understanding of their cost structure.

Costing customer activities like cash withdrawals, updating passbooks, and returning checks helps determine the cost of serving each customer category.

A unit cost represents the total expenditure of producing and selling one unit of a product or service, encompassing both fixed and variable costs.

Service cost refers to the expense incurred when another person performs a specialized task requiring expertise.

Service costing aims to determine the total operating cost and cost per service for service organizations like transportation, hospitals, and schools.

A financial statement that summarizes a company's revenues and expenses over a specific period, ultimately determining its net income.

The amount remaining after a company deducts its expenses, interest payments, and taxes from its revenue.

Costs that are incurred in the process of generating revenue, such as wages, rent, and utilities.

The money a company earns from selling its products or services.

The practice of controlling a company's expenses to optimize profitability while ensuring the business remains strong.

Costs that change with the level of production, such as raw materials or direct labor.

Costs that remain constant regardless of the level of production, such as rent, salaries, or insurance.