Chapter4FullcostingManagementAccountingforDecisionMakersTenthEditionCompareandcontrastthefullcostingandvariablecostingapproachesDiscusstheusefulnessoffull(absorption)costinformationtomanagersLEARNINGOUTCOMESYoushouldbeableto:Deducethefull(absorption)costofacostunitinasingle-productandamulti-productenvironmentDiscusstheproblemsofdeducingfull(absorption)costinpracticeFigure4.1UsesoffullcostbymanagersAssessingrelativeefficiencyUsesoffullcostExercisingcontrolPricingandoutputdecisionsAssessingperformanceFigure4.2KeystepsinprocesscostingStep1Step2Step3Step4Step5MeasurethetotalproductionoutputCalculatetheequivalentunitsofoutputthisrepresentsMeasurethetotalcostofproductionCalculatetheaveragecostperequivalentunitofoutputAllocatethetotalcostbetweencompletedunitsandWIPDirectandindirectcostAllotherelementsofcost:thatis,thosethatcannotbedirectlymeasuredinrespectofeachparticularunitofoutputCategoriesofcostDirectcostCostthatcanbeidentifiedwithspecificcostunits–theeffectofthecostcanbemeasuredinrespectofeachparticularoutputIndirectcostor

overheadsSource:Al-Omiri,M.andDrury,C.(2007)AsurveyoffactorsinfluencingthechoiceofproductcostingsystemsinUKorganizations,ManagementAccountingResearch,

Vol.18,pp.399–424.Figure4.3PercentageoffullcostcontributedbydirectandindirectcostFullcostofthejobDirectcostofthejobFairshareofindirectcost(overheads)Figure4.4TherelationshipbetweendirectcostandindirectcostTotal(orfull)costFixedcostVariablecostFigure4.5Therelationshipbetweenfixedcost,variablecostandtotalcostTotal(orfull)costofaparticularjobFixedcostIndirectcost(overheads)DirectcostVariablecostFigure4.6Therelationshipbetweendirect,indirect,variableandfixedcostsofaparticularjobAparticularsail(job)AscertainthetotaloverheadsforMarineSuppliersLtdfortheperiodDeriveasuitableoverheadabsorptionrateforthebusinessasawholeApplytheoverheadabsorptionrate(basedonthespecificsofthejob,forexampledirectlabourhours)OverheadsDirectlabour

Costofdirectlabour

forthesailDirectmaterials

CostofdirectmaterialstomakethesailDirectcostFigure4.7Howthefullcostisderivedforthesail

byMarineSuppliersLtdinActivity4.9Totaloverheadsformonth(￡20,000)Job1(￡10,000)Job2(￡10,000)DirectlabourhourbasisJob1(￡14,000)Job2(￡6,000)MachinehourbasisFigure4.8TheeffectofdifferentbasesofchargingoverheadstojobsinExample4.3DealingwithoverheadsonadepartmentalbasisExpertiseAccountabilitySizeandcomplexityReasonsfordividingabusinessintodepartmentsinclude:Figure4.9Acostunit(JobA)passingthroughAutosparkleLtd’sprocessPreparationdepartmentCustomersFinishingdepartmentPaintshopdepartmentJobA

*Direct

materials

*Direct

labour

*Ashareof

the

Preparation

department’s

overheads

Fullcostofthejob++=Costaccumulated*Anyfurther

directcost

*Ashareof

the

Paintshop’s

overheads

*Anyfurther

directcost

*Ashareof

the

Finishing

department’s

overheads

Figure4.10AnalysisofthenumberofcostcentreswithinabusinessSource:BasedoninformationtakenfromDrury,C.andTayles,M.(2006)ProfitabilityanalysisinUKorganisations,BritishAccountingReview,vol.38,pp.405–25.TypesofcostcentresServicecostcentresProductcostcentresDividingoverheadsbetweencostcentresCostapportionmentCostallocationFigure4.11ThestepsinhavingoverheadshandledonacostcentrebasisStep1Step2Step3Step4Step5Step6Step7Allocatespecificcostcentreoverheadstotherelevantcostcentre

Apportiongeneraloverheadsbetweencostcentres

AscertainthetotalforallocatedandapportionedoverheadsforeachcostcentreApportionservicecostcentrecoststoproductcostcentres

AscertainthetotaloftheoverheadsforeachproductcostcentreCalculateacostcentreoverheadabsorptionrateforeachproductcostcentre

Costunitsabsorboverheadsastheypassthrough

productcostcentresFigure4.12DemandformoreaccuratecostingSource:Clinton,D.andWhite,L.(2012)Rolesandpracticesinmanagementaccounting:2003–2012,StrategicFinance,vol.94,pp.37–43.%30201040050%No

greaterSlightly

greaterSomewhat

greaterSignificantly

greaterMuch

greater20122003Figure4.13DerivingthecostofonecostunitwhereproductionisinbatchesThefullcostofthebatch,derivedon

a‘job-costing’basisThenumberofcostunits(products)inthebatchThefullcostofonecostunit(product)dividedbyequalsNon-manufacturingoverheadsMaybeincludedaspartoffullcostBUTAnarbitrarybasisofassignmenttoproductsisoftenused

Mustbeexcludedforexternalreportingpurposes

Source:FigureadaptedfromCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.12.Figure4.14Theuseoffullcostinformation4530

15600%SmallMediumLargeVerylarge<50employees50–250employees250–10,000employees>10,000employeesVariablecostingversusfullcostingVariablecostingF