 # Summary Samenvatting FIDM

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• Indirect costs are related to a particular cost object but cannot be traced to it because
- cost element is shared among cost objects (common costs)
- physically impossible to trace
- not cost effective to trace
- Assumes all overhead is volume related
- Organization-wide or departmental rates all related to single activity measure
- Departmental focus, not process focus
- Focus on costs incurred, not cause of costs
is the amount of overhead applied to work-in-process during the period using the predetermined overhead rate and the actual amount of inputs used
• Cost allocations act as
an internal tax system
• If AC < MC
Allocated costs are less than the opportunity costs incurred
• If AC is at minimum
AC = MC
• MC is above AC when
AC is increasing
• MC is below AC when
AC is decreasing
• Joint costing: Physical measurement method
Determine weighing of joint cost allocated accordingly with production in kg
• Joint costing: Sales value at split-off method
Determine weighing of joint cost allocated accordingly with sales value
• NRV is
the difference between the selling price and costs that would be incurred after the split-off point
• Conversion costs
• Absorption costing
Allocate all manufacturing costs (full costs) into product costs.
Operating income = sales x (price - var. costs) - fixed OH costs
• Variable costing (=direct costing/marginal costing)
Excludes fixed costs from product costs and writes them off in the year that the costs are incurred.
Operating income = sales x (price - full costs) + (actual production - normal production) x fixed OH rate
• Dysfunctional effect under absorption costing:
- Managers can defer recognition of fixed manufacturing costs by building ending inventory
- Incentive to over-produce
• For which type of costing does level of sales determine break-even point
Variable costing
• For which type of costing do both levels of sales and production determine break-even point
Absorption costing
• Activity based costing (ABC)
- Allocation of indirect costs based on causal activities
- Attempts to identify 'direct link' between cost and cost object
- Results in better (more accurate) allocation
• Activity cost drivers consist of
Transactions and duration drivers
• Examples unit-level activities
Direct materials and labour, energy costs, expenses consumed in proportion to machine processing time
• Examples batch-related activities
set-ups, purchase ordering and first-item inspection activities
Plant management, property costs, salaries of general administrative staff
• Aggregation error
Occurs when a cost system pools dissimilar resources together in the same pool.
This induces errors because the system design asserts similarity in consumption patterns for dissimilar resources
• Specification error
Occurs when an incorrect cost driver is chosen.
e.g. all labor-related overhead might be allocated using labor hours, even though some of these costs might vary with labor costs (not hours) and FTE counts
• Measurement error
can occur both when the costs to be allocated are calculated and/or when driver quantities are measured incorreclty
• Two parameters required in TDABC method
The number of time units (e.g. minutes) consumed by the activities related to the cost object
The capacity cost rate per time unit
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Mix variance
Arises when the mis of inputs used differs from the predetermined mix of inputs included in the calculation of a standard cost of an operation
Yield variance
Arises because there is a difference between the standard output for a given level of inputs and the actual output attained
Spending
- Variable: AVOH - (VOHR x AV)
- Fixed: AFOH - FOH
Efficiency:
- Variable: VOHR x (AV - SV)
- Fixed: no
Volume:
- Variable: no
- Fixed: FOHR x (SV - BV)
pitfalls volume variance
- management may have maintained some extra capacity to meet uncertain demand increases that are important to satisfy customer demands.
- production volume variance focuses only on costs. It does not measure the opportunity cost of unused capacity.
- measuring and rewarding performance using the production volume variance induces managers to build inventories.
Volume variance
arises when actual volume differs from the denominator-level used to calculate the budgeted fixed OH rate.
Production volume variance is an estimation of unused or over-used capacity of the facility.
Spending variance
measures the difference between how much overhead was actually incurred versus how much overhead should have been incurred for the actual volume worked.
Spending variance is a ‘catchall’ variance that captures everything not explained by the efficiency and volume variances