18 Questions
What is the primary purpose of understanding costs in a business?
To set prices appropriately and value inventory
What type of cost is directly associated with a product?
Direct cost
What is the term used to describe costs that cannot be directly associated with a product?
Overheads
What is the method of costing that takes into account both direct and indirect costs associated with the manufacture of a product?
Absorption costing
What is the term used to describe costs that remain the same even if the production level changes?
Fixed cost
What is the purpose of calculating a simple 'blanket' overhead rate in absorption costing?
To allocate overhead costs to different products
What is the classification of the cost of films purchased for sale to customers with respect to the film section?
Direct and Variable
Which of the following costs is classified as indirect with respect to the film section?
Electricity cost of Crescendo store
What is the purpose of absorption costing?
To spread indirect manufacturing or overhead costs fairly across the range of products
What is the classification of the annual retainer paid to a film distributor with respect to the number of films sold?
Fixed
How can overhead or indirect manufacturing costs be shared fairly between products using absorption costing?
By creating a blanket rate and charging it to each product
What is the main difference between absorption costing and marginal costing?
Absorption costing considers fixed costs, while marginal costing does not
What is the main reason why a departmental rate cannot be determined after the actual costs are known?
Because it would be too late to re-negotiate selling prices with customers
What is the term used to describe the process of spreading overhead costs fairly across all products?
Overhead allocation
What is the main advantage of calculating a departmental rate for each manufacturing department?
It makes the cost allocation process more accurate
What is the term used to describe the cost allocation method that divides the total estimated manufacturing overhead cost by the estimated volume?
Blanket rate
Why are the manufacturing costs based on estimates and not actual costs?
Because actual costs are not available at the beginning of the year
What are the two main factors that the accuracy of estimated manufacturing costs depend on?
Forecasted levels of production and supplier negotiations
Study Notes
Full Costing
- Understanding costs is crucial for business decisions, maintaining profitability, setting prices, and valuing inventory.
- Direct costs are directly associated with a product (e.g., material and labor costs).
- Indirect costs, also called overheads, cannot be directly associated with a product (e.g., rent and depreciation).
Classification of Costs
- Direct (D) or Indirect (I) costs:
- Annual retainer paid to a film distributor: I
- Electricity cost of Crescendo store: I
- Cost of films purchased for sale to customers: D
- Freight-in cost of film purchased by Crescendo: D
- Leasing of computer software used for budgeting at Crescendo: I
- Subscription to «Video Novo» magazine: I
- Fixed (F) or Variable (V) costs:
- Annual retainer paid to a film distributor: F
- Electricity cost of Crescendo store: V
- Cost of films purchased for sale to customers: V
- Freight-in cost of film purchased by Crescendo: V
- Leasing of computer software used for budgeting at Crescendo: F
- Subscription to «Video Novo» magazine: F
Absorption Costing
- A management accounting technique that spreads indirect manufacturing or overhead costs fairly across products.
- Calculates a blanket rate to charge to each product.
- Calculation: Total indirect costs ÷ Estimated number of products = Blanket rate per product.
Case Study: Smart Sports
- Sam wants to expand his tennis racquet range to badminton racquets and needs to consider how to spread costs fairly across products.
Departmental Rate
- A more accurate way to allocate overhead costs by calculating a rate for each manufacturing department.
- Absorption costing can be made more accurate by calculating a departmental rate.
Test your understanding of absorption costing methods, including calculating overhead rates and fully costing out products. Learn about the importance of understanding costs in business decisions and the limitations of traditional costing methods.
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