Full costing
The cost-centre method: direct costs charged, indirect costs allocated in two stages, cost driver and its rate, then the cascade from purchase cost to production cost, cost price and product profit.
- 26 cards
- 5 topics
- Free
The outline, topic by topic
Each topic is weighted the way the exam weighs it.
- Concepts
- Questions
- Sort and link
- Scenarios
- Understand
A few cards from the deck
Full costing method: what is it?
Show the answer
A method that charges each product with all includable costs, direct and indirect, the indirect ones passing through cost centres.
It gives the full cost price of a product, fixed costs included. It answers "what does a product cost us in total?", not "what would we lose by stopping it?".
After the primary allocation, the workshop carries €30,000. The auxiliary Maintenance centre, which carries €12,000, is allocated 25% to purchasing, 50% to the workshop and 25% to distribution. What is the workshop's total after the secondary allocation?
- 36 000 €
- 42 000 €
- 30 000 €
- 24 000 €
Show the answer
36 000 €
The workshop receives 50% of €12,000, i.e. €6,000: 30,000 + 6,000 = €36,000. €42,000 adds the whole of Maintenance, ignoring the key; €30,000 forgets the secondary allocation; €24,000 subtracts the share instead of adding it.
The … allocation splits indirect costs between all the centres; the … allocation transfers those of the auxiliary centres to the main centres.
Show the answer
The primary allocation splits indirect costs between all the centres; the secondary allocation transfers those of the auxiliary centres to the main centres.
At the end of the secondary allocation, only the main centres carry costs. Each can then be divided by its number of cost-driver units.
Cost centre: what is it?
Show the answer
A subdivision of the company that gathers indirect costs before they are charged to products; it is a main one if it works directly for products, an auxiliary one if it works for other subdivisions.
Purchasing, workshop and distribution are main centres; administration, maintenance or IT are auxiliary: their costs are transferred to the main ones.
In full costing, product B shows a loss and management wants to stop it. Which approach is the safest?
- First compare its contribution margin with its own fixed costs
- Stop B: a negative result proves that it loses money
- Change the allocation key so that B bears fewer fixed costs
- Pass B's loss on to the selling price of the other products
Show the answer
First compare its contribution margin with its own fixed costs
Full costing charges B with a share of common fixed costs (rent, management) that remain if it stops and would then fall on the other products. Only its own fixed costs would disappear with it: if its contribution margin exceeds them, stopping it lowers total profit.