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Syllabus G. Finance In Planning And Decision-Making G3. Cost And Management Accounting

G3abc. Cost accounting in strategy development

Cost accounting in strategy development

Multi Product Costing

Where units of output are not identical thence need to split costs into direct and indirect

Direct costs - are costs that can be identified with a specific product (eg labour for a garage mechanic)

Indirect costs (overheads) are costs that cannot be identified with a specific product (eg rent of a garage)

The direct / indirect split is NOT the same as fixed v variable

As indirect costs can’t be applied directly to a product we need to come up with a formula to share these costs to the products - such as labour hours or actual activities (in activity based costing)

There is no one correct method for doing this

Overhead Apportionment

Full absorption Costing

This is the total amount of resources (direct + indirect costs) used and should be used in the following scenarios:

  • Pricing & Output decisions

  • Exercising control

  • Assessing efficiency

  • Income measurement

If the full absorption price is charged as the sales price then the company will break even
Full costing like this may be seen as not useful because it is backward looking - it includes information thats irrelevant to decision making (fixed costs for example)

Dealing with Overheads on a departmental basis

Indirect costs can be put into segments such as the separate departments - then each department can share these across its own products using whichever basis it chooses

Batch Costing

Here the cost per unit can be calculated as:

Cost of the batch (indirect + direct) / Number of units in the batch

Activity Based Costing

This treats all indirect costs as being caused by ‘activities’

It is argued that this is more relevant in the modern business world where lots of things cause costs now - not just labour hours - which was the case in old fashioned factories etc

Understanding what drives these activities leads to more relevant decision making and better control of overheads

However it is argued that all this costs time and money to collect and record such information and this outweighs its benefits