MGMT Accounting Module 2: Costing Systems

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Author:
jordan_hs
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224024
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MGMT Accounting Module 2: Costing Systems
Updated:
2013-06-16 10:36:05
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Costing
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Notes for costing
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  1. 3 aspects of costing systems and subsequent calculations
    • 1. Cost Accumulation
    • 2. Cost Tracking/Tracing
    • 3. Overhead Allocation
  2. Cost Accumulation
    • 1. Job Costing - costs are accumulated by job
    • 2. Process Costing - costs are accumulated by processes within production
    • 3. Hybrid Costing - some costs accumulated by job, some costs accumulated by processes
  3. Cost Tracking
    • Affects how costs are tracked, assigned to jobs or processes
    • 1. Actual costing - uses actual costs for DM, DL, and overhead to determine unit cost
    • 2. Normal costing - uses actual costs for DM, DL, and measures OH via predetermined basis
    • 3. Standard costing - uses standard/predetermined standards for all costs (DM, DL, OH)
  4. Overhead Allocation
    • 1. Functional costing - Plantwide overhead rate, Departmental overhead rate
    • 2. Activity based costing - trace costs to activities and then to product costs and other cost objects
  5. Advantages of Functional (Traditional) costing
    • - Easy to calculate
    • - Spread costs
    • - Accurate figures (if low product diversity)
  6. Disadvantages of Functional (Traditional) costing
    • - assumption of all costs related to units
    • - Does not work well with product diversity (single measure of resource usage can distort allocations)
  7. Advantages of Activity Based Costing
    • - Provides accurate cost allocations (if product diversity is high)
    • - Provides better information on what individual activities cost
    • - Better information for management of activities
  8. Disadvantages of Activity Based Costing
    • - Still relies on estimates of total usage
    • - Costly and time-consuming
    • - Complex
  9. Time Driven ABC
    • - before-the-fact method
    • 1. calculate total operating cost
    • 2. calculate capacity cost rate (total op cost/practical capacity)
    • 3. estimate time to perform one unit of activity (Activity rate X Total activity output)
  10. Approximately Relevant ABC
    • After-the-fact method
    • - do analysis of accounting system, only use most expensive activities
    • - all other costs can be added to cost pools of expensive activities
  11. Equally Accurate ABC & Expected global consumption ratio
    • After-the-fact method
    • - use consumption ratios to reduce number of drivers

    • EXPECTED GLOBAL CONSUMPTION RATIO
    • proportion of total activity costs consumed by a given product
  12. Standard costing
    Costs calculated using a standard cost for each aspect
  13. Price v Quantity standards
    Price = how much should be paid for quantity of input to be used

    Quantity = how much of the input should be used per unit of output
  14. Ideal vs Attainable standards
    Ideal = demands max efficiency and achieved if operation runs perfectly

    Attainable = can be achieved under efficient operating conditions. Allowance for breakdowns, slack, lack of skill.
  15. Kaizen standards
    continuous improvement standards. reflect planned improvement and are a type of currently attainable standard
  16. Benefits of Standard Costing
    • - Basis for cost comparison
    • - Management by exception
    • - Performance measure
    • - Motivation
  17. Limitations of Standard costing
    • - Focus on cost minimisation
    • - department focused, rather than process
    • - costs control
    • - focus on variance leads to focus on consequences, rather than cause of problem
  18. Target costing
    • 1. Specify product
    • 2. Set target price & volume
    • 3. Deduct target profit margin
    • 4. Identify target cost
    • 5. Design product and process to achieve target cost
  19. Benefits of Target costing
    • - Associated with life cycle cost management
    • - strategic positioning clearly considered
    • - improve production processes/profits
  20. Challenges of Target costing
    • - Get suppliers to buy into target costing
    • - Get employees to buy into TC: requires culture change
  21. Target/Kaizen costing vs traditional cost management
    • Target/Kaizen: focuses on cost reduction
    • Traditional: focuses on cost control within the production stage

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