cima c1 unit 3 2012(1)
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CIMA C1Fundamentals Of Management Accounting
Overheads & Absorption Costing
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CIMA C1Fundamentals of Management Accounting
Class Slides Ian Wilson
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1 Consider !hat overheads are" ho! the#are allocated to product unit costs & themethods emplo#ed
$
Calculate Overhead Absorption% repare cost statements for allocation &
apportionment of overheads" includingreciprocal departments
' Calculate direct" variable & full costs ofproducts" services & activities usingoverhead absorption rates
( Appl# information to pricing decisions
Learning Aims (CIMA)
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We have seen that business costs can be" andneed to be )classi*ed+ b# t#pe & behaviour
,irect Materials ,irect -abour ,irect ./penses 0 Prime Cost roduction Overheads OA23
0 Total Production (Absorbed Cost) 4on5roduction Overheads 0 Total Cost
Context & Link to Session1
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Costs )behave+ in a variet# of !a#s67he classi*cations are6 8ariable Costs
Semi58ariable Costs Step Costs Fi/ed Costs Once costs t#pes & behaviour is 9no!n"
!hat happens ne/t: Wh# did !e collect this information:
Context & Link to Session1
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Ke !m"#asis in $ areas o% use6
1 Stoc9 8aluations" !hat is the value;cost ofinventor#:
$ lanning" future forecasts% Control" actual against planned
performance
' ,ecision Ma9ing" the )right+ outcome in
terms of cost;pro*tfor the business
Context & Link to Session1
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,irect Costs are )eas#+ to deal !ith" the#relate to )cost units+
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7he method Accountants used to chargeindirect costs to cost unit is called)A+
CIMA denition o% an 'er#ead6 An overhead is )expenditure on labour,materials, or services that cannot beeconomically identifed with a specifc
saleable cost unit+
Context & Link to Session
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Absorption Costing is a method of sharingOverheads Indirect Costs;./penses3bet!een a number of di?erent Finishedroducts on a )+Fair++ basis
=ou !ill have to consider the %A+s6
1 Allocation
$ Apportionment & re5apportionment3
% Absorption' oint % leads to Over;@nderAbsorption
'er#ead Costing & Absor"tion
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It ma# be useful to s9etch out ho! costs areallocated" apportioned and *nall# absorbedinto a single product cost per unit
7his is a useful summar# I al!a#s use togive #ou a )map+ to follo! & remember
Ma9e sure #ou note this do!n6
Absor"tion Cost *iagram
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A Compan# !ill have a 7otal roductionOverhead spend in mind" sa# (BB
If it has $ ,epartments" Cutting & Finishing"ho! much does it charge to each of these,epartments:
,ividing up Overheads is a critical processas the# !ill drive Absorption rates as !e
have alread# seen We follo! a % stage process6
Allocation &A""ortionment
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1 Allocation
$ Apportionment
% 2e5Apportionment
.=ou must be able to tac9le all %6
Allocation &A""ortionment
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Allocation6 Means6 Charging cost centres !ith Overheads that
are incurred solely in that centre
eg6 a salar# of a supervisor in a particularcost centre
Allocation &A""ortionment
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A""ortionment+ Means+ Some costs relate to a business as a !hole
)+Splitting++ shared Overheads bet!een costcentres using some form of )+fair++ basis
eg6 using Door area for rent & rates 6 using number of emplo#ees for canteen
costs 6 using value of assets for ,epreciation
charges
Allocation &A""ortionment
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,e-A""ortionment Means+ 2e5splitting Overheads from )service+ cost
centres to )production+ cost centres eg6 moving service costs for sa# Canteen &
Maintenance centres to production costcentres based on bene*t & use of those
service centres
Allocation &A""ortionment
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./ercise 1 page %E We can complete this e/ercise to practice
the theor#" *rst lets get our details right
Indirect Wages & Materials have alread#been A--OCA7.,to the various cost centres Machining 5 roduction Assembl# 5 roduction
Finishing 5 roduction Maintenance Service -ets calculate an ans!er6
Allocation &A""ortionment
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4ot all departments are 2O,@C7IO4based
Some departments provide )Services+ toproduction departments
7hese departments are called S.28IC.departments
Secondar# apportionment is therefore
apportioning service centre costs toproduction cost centres
Secondar A""ortionment
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What happens !hen service centres provideservices for each other:
7his is )service+ to )service+
7here are $ !a#s to deal !ith this issue61 .limination
$ 2epeated ,istribution
../amples $ & % provides the ans!er
,eci"rocal Sericing
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aving allocated;apportioned our overheadsto a Cost centre" !e need to add them to" orabsorb" these costs in to the Cost of Sales
roduction Overheads are added to the)rime Cost+ seen earlier in the course
7he OA2Overhead Absorption 2ate3 can beseen as a )charge out rate+ for Overheads
Authors also call this )
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7here are % common !a#s to achieve this6
1 A 2ate per @nit identical units3
$ A 2ate per -abour our human time
intensive3% A 2ate per Machine our machine time
intensive3
All of the above are set at a pre5determined
rate" using
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2ates of Overhead A8.to be available atthe S7A27of the production period
7he business CA44O7!ait until the end ofthe accounting period to see !hat theAC7@A-production overhead costs !ere
7he .7*gures for Overheads are used
OA20
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We !ill !or9 out ./ercises ' & ( Ma9e sure #ou practice this at home It is vitalfor A-- CIMA Management
Accounting papers #ou ta9eG 4ote6 OA2 2ates can be6
1
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7r# ./ercise E age '17his is a t#pical )e/am st#le+ Juestion=ou are given ' ans!ersG
Which is correct:
!/AM 0'CS
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7he OA2is based on estimates 7hisestimate is Juanti*ed in the ).7+
Overhead Costs & Output Activit# -evels areestimated;
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In Sim"le Terms6
Over Absorbed6
Absorbed Overhead KActual Overhead
@nder Absorbed6 Absorbed Overhead LActual Overhead
'er & under Absor"tion
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A possible la#out for #our calculation6 I call this the %
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Aurricula -td age '$
We can practice over;under absorption
calculations for this problem
7r# & use the la#out I suggested for thisJuestion 2emember the )% bo/ approach+
!xercise 2
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We have seen that Costs can be used for61 8aluing Stoc9
$ lanning
% ,ecision ma9ing' Control.What else !ill product;service costs be used
for:
Costs
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As a Management Accountant" #ou !ill beas9ed to )price+ products based on their costvalue 7his means setting the Sales rice
=ou !ill have to consider6
1 Mar95uppro*t e/pressed as a of cost3
$ Marginpro*t e/pressed as a of price3
7r# the e/ample ./ercise (" page ($ of #ournotes
Pricing
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Marginal Costing
3#at is Marginal Costing:7his ta9es place !here Overhead Costs are
!ritten o? in full to the period in !hich the#occur
roduction Overheads under this methodare 4O7 added to rime Cost as is the case!ith Absorption Costing
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,irect Materials ,irect -abour 8ariable Costs ,irect ./penses
0 rime Cost roduction Overheads 5 Fi/ed Costs via OA2
0 7otal roduction Absorbed Cost3
4on5production Overheads 0 7otal Cost
Absor"tion Costingtem"late
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,irect Materials ,irect -abour 8ariable Costs ,irect ./penses
0 rime Cost roduction Overheads Fi/ed Costs 4on5production Overheads 5 Fi/ed Costs 0 7otal Cost
Marginal Costing tem"late
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Sales -ess roduction Costs 0 >ross ro*t
>ross ro*t -ess ./penses 4on5roduction3 0 4et ro*t
Absor"tion Costingtem"late
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Sales -ess 8ariable Costs rime3 0 Contribution
Contribution -ess Fi/ed Costs6 Fi/ed roduction Costs Fi/ed 4on5roduction Costs 0 4et ro*t
Marginal Costing tem"late
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Write do!n the data I have" !e can practiceMarginal A4, Absorption Costing techniJues6
Sales rice6 $B ,irect Materials E ,irect -abour % 8ariable overheads ' All above are .2 @4I7
Fi/ed Overheads $B"BBB
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Actual roduction & sales !as $B"BBB @nitsin a particular month6
Calculate6
1 Contribution per @nit
$ 7otal Contribution for the month
% 7otal ro*t for the Month A-- usingMA2>I4A- COS7I4>
' ro*t for the month using AbsorptionCosting
Marginal Costing !xam"le1
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In this e/ercise" the ro*ts achieved !erethe sameunder Marginal & Absorptionmethods
Wh#:
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7he reconciliation can be made simpler b#!or9ing to a method6
4ote67his is an e/am favourite topic -earn the ne/t slide !ell6 AC 0 Absorption Costing ro*t MC 0 Marginal Costing ro*t
A business can have opening& closingstoc9s Stoc9 levels MA=di?er We can then tac9le a second Juestion6
Marginal Costing
b i & i l
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If Op Stoc9 K Close Stoc9
If Op Stoc9 0 Close Stoc9
If Op Stoc9 L Close Stoc9
Absor"tion & MarginalCosting+
MC ro*t K AC ro*t
MC ro*t 0 AC ro*t
MC ro*t L AC ro*t
7hese are .= 2ules6 remember them
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Sales rice 1B ,irect Materials % ,irect -abour $
8ariable overheads 1 Fi/ed Overheads 1B"BBB per month
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Fi/ed overhead & Stoc9 .?ect 2e5!or9 ./ercise $ Ma9e the follo!ing adustment6
Actual roduction 0 E"BBB @nits Actual Sales 0 '"NBB units Calculate the Absorption & Marginal ro*t
Statements
7hen" 2econcilethe di?erence in pro*ts6
!xercise 4
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