Académique Documents
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TASK I
Absorption costing vs.
Activity-Based Costing
Allocation
Apportionment
Re-apportionment
Absorption
1. Allocation
Allocation of costs to cost centres
Total production costs
Indirect costs
Direct costs
(overheads)
Allocate
COST CENTRES
Allocate
Production 1 Production 2
Service
COST UNITS
2. Apportionment
Two stages of apportionment:
1.Overheads which are unable to allocate to
particular cost centres are assigned to
different cost centres
2.Re-apportionment of service cost centre
overheads to production cost centres
3. Re-apportionment
Allocation of costs to cost centres
Total production costs
Indirect costs
Direct costs
(overheads)
COST CENTRES
1. Allocate
& Apportion
Allocate
Production 1 Production 2
Production 1 Production 2
Service
2. Re-apportion
COST UNITS
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4. Absorption
Step 1: Identifying absorption base e.g. unit,
labour hour, machine hour, % of direct labour
Step 2: Determining overhead absorption rate =
production overhead / activity level
Step 3: Overhead absorption into cost units
4. Absorption
Allocation of costs to cost centres
Total production costs
Indirect costs
Direct costs
(overheads)
COST CENTRES
1. Allocate
& Apportion
Allocate
Production 1 Production 2
Production 1 Production 2
COST UNITS
Service
2. Re-apportion
3. Absorb
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Disadvantages
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Disadvantages
Accurate costing
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ABC System
Approach
Scope
Determines profitability or
efficiency level but ignores
cost of individual product
units
Identifies of non-profitable or
inefficient products
Methodology
Legal validity
Suitability
TASK II
Standard Costing &
Variance
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Standard Costing
The preparation and use of standard costs,
their comparison with actual costs and analysis
of variances to their causes and points of
incidence (Debarshi 2011: 537)
Features
Predetermination of suitable standards for cost and
sales elements
Comparison between actual and predefined
performances
Analysis to assess the causes of variance
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Makes inventory
Measurement more
easier & logical
Reduces production
costs
Advantages
Cost savings in
record-keeping
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Disadvantages
Can be tricky
to decide
which variances
are important &
considerable
Focus on negative
aspects & belief may
lead under-reporting.
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Standard cost
Calculation of direct material
The direct material cost of a single unit of product can be
calculated as Price x Quantity
standard quantity
standard price for
of material
a single unit of material
required for one
unit of product
Example:
6 (price of a ply sheet)
5 sheets
= 6 x 5 = 30
Where,
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Standard cost
Calculation of direct labour
The direct labour cost of a single unit of product can be
calculated as Wage rate x No. of labor hours
Standard per hour wage rate
Standard No. of
labour hours
Example:
10 (per hour)
2 (required hours
for each table)
= 10 x 2 = 20
Where,
Standard cost
Calculation of manufacturing overheads
A manufacturing overhead standard rate needs to be applied on
products each unit
= 5
Where,
Standard cost
Example Summary
Standard Costs for producing a single table
Direct materials
6 X 5 sheets
30
10 X 2 hours
20
Direct labor
Manufacturing overhead
5 X 2 labor hours 10
Total standard cost
60
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Types of Variance
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Favourable
Unfavourable
Material price
Inaccurate budgeting
Shift to more costly supplier
Unanticipated increase in price
High quality of material
Material usage
Labour rate
Inaccurate budgeting
Overtime/bonus deduction
Unskilled staff
Labour
efficiency
Inaccurate budgeting
Enhanced staff motivation
Higher skilled staff
Inaccurate budgeting
Staff de-motivation
Unskilled staff
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Actual Quantity
x Standard Price
(AQ) x (SP)
(1700) x (4)
Materials Price
Variance
(MPV)
(3.9 4) x 1700
-170 (Favorable)
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Standard Quantity
x Standard Price
(SQ) x (SP)
(1000x1.5) x (4)
Materials
Qty Variance
(MQV)
(1700 1500) x 4
+800 (Unfavorable)
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Std. Quantity
x Std. Price
(SQ) x (SP)
(4) x (1000x1.5)
Total Material
Variance
(TMV)
6630 6000 =
30 (Favorable)
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Actual Hours
X Standard Rate
_
(AH) x (SR)
(1450) x (6)
Labor Price
Variance
(LPV)
(6.2 6) x 1450
+290 (unfavorable)
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Standard Hours
x Standard Rate
(SH) x (SR)
(1000x1.5) x 6
Labor
Efficiency Variance
(LFV)
(1450 1500) x 6
-300 (favorable)
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Standard Hours
x Standard Rate
(SH) x (SR)
(1000x1.5) x 6
Total Labour
Variance
(TLV)
1450 9000
-7550 (Unfavorable)
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References
Banerjee, B. (2006). Cost accounting: theory and practice. 12th edition, PHI Learning
Pvt. Ltd
Bendrey, M., Hussey, R. and West, C. (2003). Essentials of Management Accounting
in Business. Cengage Learning EMEA
Berger, A. (2011). Standard Costing, Variance Analysis and Decision-Making. GRIN
Verlag
Cokins, G. (2002). Activity-Based Cost Management: An Executive's Guide. John
Wiley & Sons
Debarshi, B. (2011). Management accounting. Pearson Education India
Drury, C. (2005). Management and Accounting for Business. Cengage Learning
EMEA
Hilton, R.W. and Platt, D.E. (2011). Managerial Accounting: Creating Value in a
Global Business Environment. McGraw-Hill Irwin
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References
Kaplan Financial Knowledge Bank (2014). Variance analysis. [online]. Available at:
http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Variance%20Analysis.asp
x
(Accessed 06 February 2014)
Lewis, R.J. (1995). Activity-based Models for Cost Management Systems.
Greenwood Publishing Group
Lucey, T. and Lucey, T. (2002). Costing. Cengage Learning EMEA
Lindberg, C.A. and McKean, E. (2005). The Office Professional's Guide. Oxford
University Press
Sheeba, K. (2011). Financial management. Pearson Education India
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E. (2009). Managerial Accounting: Tools
for Business Decision Making. 5th edition, John Wiley & Sons
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Questions
?
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