Absorption
Costs also known as Full
cost - absorbs its share of fixed production costs overhead
Variable Costs -costs
that change in magnitude with production or sales levels
Fix Costs – Costs
do not change as production or sales move up or down.
Engineered Costs - Cost engineered into the product i.e.
material, manufacturing overhead
Discretionary Costs – Costs that
need not be incurred every accounting period at the level that mangers have
come to expect i.e. Machine maintenance, administrative support, R&D.
Equation
Method
Sales
= Fixed costs + Variable costs + Profits
Break-even
Sales = Fixed cost + Variable costs
Contribution
Margin Method – focus on amount of profit earned by each unit of
product given that fixed costs will be incurred anyway.
Contribution
margin = Sales revenue – Variable costs
Contribution
Margin Ratio Method (or Profit /Volume Ratio)
Ratio
= Contribution margin per unit / Sales revenue
Break-even
Point = Fixed costs / Contribution margin ratio
Contribution Costs = Sales –
variable (marginal) costs incurred in generating sales revenue ) x Units
Contribution = Selling
Price – (variable cost / units)
|
Mtrl/resource Unit measure to produce |
Sales (Units) |
Contribution Cost (Variable Cost) |
Contribution Units (Contribution cost/ sales) |
Contribution per Material Cost (Material resource X Contribution unit) |
Rank 1 = High 2 3 = Low |
|
|
|
|
|
|
|
Direct – Each Service department
emptied out to production departments and added to the overhead rates based on
suitable activity base
Step – Descending order
allocate services to all department till only the products exist.
Activity Based Costing (ABC)
– Focus on belief that activities rather than products cause costs to be
incurred and products consume activities and thereby cost.
Net Sales Value – Money
generated by each product
Physical measure – divided
based on physical amount
Equal shares - evenly
across all products.