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Revision Part 1
Lecture 23
Semester 1 topics

Absorption and marginal costing and the efect

on proft

Job batch contract and process costing

Activit! based costing

"ost volume proft issues

#usiness decision ma$ing

%ecision ma$ing and uncertaint!

Pricing decisions & accounting and economic

'nvestment decisions
Absorption and (arginal "osting

)raditional (ethod & absorption

*e+ methodolog! & marginal

%iferences bet+een the t+o

,o+ do the diferences afect proft

Sho+ this on the income statement

-h! is marginal pre.erable/

Job batch contract and process
costing

0nderstand the concept o. costing .or individual

or one1of pro2ects

'denti.! the $e! problem areas +hen costing one1

of or short run production processes

Recognise that long term contracts ma! need

costing more than once over their li.e1span i.
profts are to be realised in the correct time1span

0nderstand the concept o. 3continual production4

'denti.! the $e! problem areas +hen costing using

either a mid1point in the process to calculate
costs or at the ver! end o. a production run

0nderstand that the realisation o. profts is

determined solel! b! ho+ !ou apportion the
common costs involved in the production runs
Activit! #ased "osting

0nderstand the shortcomings o. traditional costing s!stems

Limitations o. traditional costing & normall! based on some

sort o. 3volume driver4 based allocation s!stem

Appreciate the value o. A#" generated in.ormation .or decision1

ma$ing purposes

A#" lin$ed to specifc activities in the manu.acturing process &

identifes specifc areas that drive costs or materiall! afect costs

"ontrast the traditional and activit! based costing approaches o.

dealing +ith overhead costs

3Products cause activities that cause costs4 1 )!pes o. cost

drivers

#enefts and pit1.alls

Example
#rad.ord plc manu.actures product A and #5 )he .ollo+ing in.ormation is available
.rom the compan!6
Product A Product #
0nits produced 7888 28888
Selling price 988 288
%irect materials and labour per unit 288 :8
%irect labour hours 27888 ;7888
%irect labour hours per unit 7 35;7
)he compan! has a total budgeted overhead o. <2 million5 )he .ollo+ing details
are also available about overheads6
#udgeted cost"ost %river A #
=ngineering < 127888 =ngineering hours 7888 ;788
Set1ups 388888 *umber o. set1ups 288 188
(achine running 1788888 (achine hours 78888 188888
Pac$ing ;7888 *umber o. pac$ing orders 7888 18888
)otal 2,000,000
You are required to allocate overheads using both traditional and !"
costing s#stems
$olution% &raditional costing
s#stem
15 "alculate the overhead rate per direct labour hour >predetermined
absorption rate?
@ total overheadAtotal direct labour hours @ <2888888A188888
@<28 per hour5
25 "alculate overhead cost per unit
'roduct
)otal overheads allocated @ 27888 hours B <28
( )*00,000
Cverhead cost per unit @ <788888A7888 units@ )+00 per
unit
'roduct !
)otal overheads allocated @ ;7888 hours B <28
( )+,*00,000
Cverhead cost per unit @ <1788888A28888 units @ ),*
per unit
Can be anything
determined by
company i.e machine
rate, material usage,
sales/OH ratio etc.
$olution% ctivit# !ased "osting
15 "alculating the cost driver rateA or the activit! rate
-+. -2. -/.
-0.(-2./-/.
"ost driver "ost "ost driver usage "ost
driver rate
>total a D b?
< <
=ngineering hours 127888 12788
18
*umber o. setups 388888 388
1888
(achine hours 1788888 178888
18
*umber o. pac$ing orders ;7888 17888
7
2888888
$olution% !"
-+. -2. -/. -0.(-2.x-/. -*.( -0./1nits
"ost driver %river %river )otal Cverhead
rate 0sage Cverhead per unit
+. 'roduct % *,000 units
=ngineering hours 18 7888 78888 18
*umber o. setups 1888 288 288888 98
(achine hours 18 78888 788888 188
*o5 o. pac$ing orders 7 7888 27888 7
Cverhead cost per unit ;;7888 +**
2. 'roduct !% +*,000 units
=ngineering hours 18 ;788 ;7888 35;7
*umber o. setups 1888 188 188888 7588
(achine hours 18 188888 1888888 78588
*o5 o. pac$ing orders 7 18888 78888 2578
Cverhead cost per unit 1227888 2+.2*
Remember

A#" and traditional costing allo+ us

to loo$ at C, & +e still need to
account .or direct costs such as
material and labour costs etc5

SalesARevenue & "osts @ Proft

"osts6 (aterials Labour Cverheads

"ost1Eolume1Proft 'ssues

#rea$1even anal!sis
!reak even ( 3/-1$'415". or 3/1"6

"ontribution
1$'415"
"alculating target pro7t
'ro7t ( sales revenue 4 variable costs 4 7xed
costs
'ro7t ( 1$'89 4 15"89 4 3ixed costs
'ro7t ( -1nits sold x 1"6. : 3ixed costs
%ecision ma$ing 1

0nderstand the special situations in +hich onl!

relevant costs are utilised

"alculate one1of orders

0nderstand ho+ limiting .actors afect decision

ma$ing

"an be hours or materials

Product that give highest cont5

0nderstand problems involving product miB

decisions and resource constrains

-hich product to produce frst /& cont5 per limiting

.actor/

0nderstand and calculate ma$e or bu! decisions

-hich option gives the greatest contribution/

%ecision ma$ing 2

0nderstand eBpected value and

uncertaint!5

Probabilit! o. occurrence B eBpected proft

Ris$ averse ris$ neutral and ris$! approaches

=Bplain the limitations o. eBpected value5

%oes not tell the +hole stor!

#ased on estimated values

(ultiple product anal!sis

"alculateAdra+ probabilit! decision trees

A compan! has a choice o. producing 3 products each providing
diferent rates o. return as .ollo+s6 -hich should the compan!
produce/
Product A6 =Bpected proft Probabilit! =E
F88888 851 F8888
;88888 852 198888
:88888 859 328888
G88888 852 1:8888
1888888 851 188888 @ :88888
Product #6 988888 8587 28888
F88888 851 F8888
:88888 859 328888
1888888 8527 278888
1288888 852 298888 @ :G8888
Product "6 >988888? 857 >288888?
2288888 857 1188888 @ G88888
'roduct " has a higher E5 than either products ! or ", but it is
sub;ect to greater uncertaint#.
ttitudes towards risk
Pricing

0nderstand the importance o. pricing decision

ma$ing

-hat inHuences pricing & mar$eting economic legal

issues etc5

0nderstand the time horiIon o. pricing decisions

Short term vs5 long term pricing

=Bplain product li.e c!cle issues

=Bplain lin$ o. li.ec!cle costing to target costing

Li.e c!cle costing
80 % of a products costs are
locked in during the planning
and design stage
a!ority of costs are incurred at the
manufacturing stage as costs
ha"e already been locked in they
are difficult to alter.
Cost management can be most effecti"ely e#ercised at the planning
and design stage $CC led to the emergence of target costing.
'nvestment %ecision (a$ing

=Bplain in (anagement Accounting terms the meaning

o. investment

=Bplain the ma2or methods +hen revie+ing strategic

per.ormance

#ring into !our discussions on the sub2ect other t!pes o.

management theor! about investment anal!sis

0nderstand the limitations o. and eBpand upon the

core theor! o. *PEA'RR