Management Accounting: Costing Flashcards
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Which costing method charges all production overheads to products, including fixed overheads?
Answer: Absorption costing
Absorption costing (also called full costing) includes both fixed and variable production overheads in the cost of a unit, which is then included in inventory valuation and cost of sales.
The overhead absorption rate (OAR) is calculated as:
Answer: Budgeted overheads / Budgeted activity level
The OAR is predetermined using budgeted data: OAR = Budgeted overheads / Budgeted activity level (e.g., per machine hour, per labour hour, or per unit). It is applied to actual activity to absorb overheads into products.
When actual overheads exceed overheads absorbed, the result is:
Answer: Under-absorption
Under-absorption occurs when the actual overhead incurred is greater than the overhead absorbed into products (OAR × actual activity); the difference is charged as an expense in the income statement.
In marginal costing, which costs are included in the cost of a unit of production?
Answer: Variable production costs only
Marginal costing includes only variable production costs (direct materials, direct labour, variable overheads) in unit costs. Fixed production overheads are treated as period costs.
The contribution per unit is calculated as:
Answer: Selling price minus variable cost per unit
Contribution = Selling price − Variable cost per unit. It shows how much each unit sold contributes towards covering fixed costs and generating profit.
Breakeven point in units is calculated as:
Answer: Fixed costs / contribution per unit
Breakeven point = Fixed Costs / Contribution per Unit. At this output level, total contribution exactly covers fixed costs and profit is zero.