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Part A 1. Costing

We start with a revision of the more traditional cost accumulation techniques

Cost Accumulation - Revision

Costs are recorded and accumulated in a cost accounting system using one of twomain approaches:

Absorption costing - fixed costs (overheads) are charged to production units Marginal costing - fixed cost are treated as period costs and charged to the profit

and loss in the period they are incurred; only costs directly variable withproduction are charged to production units

Absorption costing

!nder traditional absorption costing" costs must be allocated" apportioned and thenabsorbed

Allocation: Costs that arise in a single cost centre (department forinstance) are allocated in whole to that cost centre

Apportionment: Costs common to more than one cost centre are sharedout amongst the cost centres using an appropriate basis

After these two processes are complete" we have to consider the need for re-

apportionment #n order for the third process - absorption - to ta$e place" alloverhead costs must be allocated or apportioned to production departments%hus" if costs have allocated&apportioned to service department they must now bere-allocated or re-apportioned

%here are three possible methods:

the direct method - ignoring any wor$ carried out by one service department foranother

the step method - accounting for the wor$ done by the service department thatdoes the most wor$ for other service departments" but ignoring the rest

the reciprocal method - recognising in full the wor$ each service department doesfor each of the other service department %here are in turn two different methodsof calculation possible here

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%hese are demonstrated using the following data:

Illustration

'mar td has four departments in their factory - the ressing *epartment" the Assembly *epartment" the Canteen" and the Maintenance *epartment 'verheadshave been allocated and apportioned to the four departments as follows:

Pressing Assembly Canteen Maintenance + + + +

Allocated , " . " /" 0" Apportioned /" 0" 1" 1"

,/" .0" 2" 3"

%he canteen is used / 4 by ressing" 1 4 by Assembly and . 4 by Maintenance

%he Maintenance department is used //4 by ressing" 5 4 by Assembly and /4by the canteen

Direct method

Pressing Assembly Canteen Maintenance + + + +

Allocated , " . " /" 0" Apportioned /" 0" 1" 1"

,/" .0" 2" 3"Canteen(/ &2 :1 &2 ) /" 1" (2" )Maintenance(//&3/:5 &3/) /".,, 1"623 (3" )

./".,, 1."623

Step Method

Pressing Assembly Canteen Maintenance + + + +

Allocated , " . " /" 0" Apportioned /" 0" 1" 1",/" .0" 2" 3"

Canteen:(/ :1 :. ) 5" ."5 (2" ) ,"0Maintenance: , "0(//:5 ) 0",16 5"501 (, "0 )

./",16 1."201

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%here is a lot of sub ectivity (guesswor$ ) involved in these first two processes