0. CIMA Paper P1 Management Accounting
江西财经大学 会计学院
熊家财

1. 1
Chapter
Traditional Costing

2. Chapter Content Traditional Costing Absorption Costing
Marginal Costing
Traditional Costing
Pricing

3. 迎评工作 一
Section 1 Cost behavior

4. The purpose of costing

5. Cost behavior

6. Cost behavior

7. Cost behavior
Fixed costs

8. Cost behavior
Fixed costs
Relevant range

9. Cost behavior
Stepped fixed costs

10. Cost behavior
Variable costs

11. Cost behavior
Variable costs

12. Cost behavior
Non-linear variable costs

13. Cost behavior
Semi-variable costs

14. Cost behavior
Analysing semi-variable costs

15. Variable Cost per Unit =
The “High-Low” method
Take highest and lowest levels of output and the associated costs:-
Period
Total Cost
Output 1 2 3 4 5
$10,000
$12,000
$8,000
$17,000
$20,000
10,000
12,500
7,500
18,750
22,500
$20,000 - $8,000
= ,500 – 7,500
= 80p per unit
Lowest Output
Highest Output
STEP 1:
Variable Cost per Unit =
STEP 2:
Change in cost
Change in output
Absolutely fundamental, and always tested.
Try Q 2.6 from p29
Fixed costs = $20,000 – (22,500 x 80p) = $2,000
TOTAL COST = TOTAL FIXED COST + TOTAL VARIABLE COST
TOTAL COST = 2,000 + ($0.08 X UNITS)

16. The scattergraph methodx
Output (units)
Cost $
a = $200
$200
$400
400 units
b = Change in Y =
$400 - $200
$0.50 per unit
y = a + bx
a = y axis intercept
b = gradient
Explain that this is very similar to the high low method, only showing it graphically.
With high low, we said:
TOTAL COST = FIXED COST + (VARIABLE COST x UNITS)
Writing this algebraically: Y = a + bx
Where:
y = total cost
a = fixed cost (where the line intersects the y axis)
b = variable cost per unit (gradient of the line)
x = number of units
Now try Q2.5 from p 28
Change in X
Therefore predicted total costs for 1000 units = $200 + (0.5 x 1000)

17. Section 2 Absorption costing
迎评工作 一
Section 2 Absorption costing

18. Absorption costing
Absorption costing is a method of costing in which the cost of a product is built up as the sum of direct costs and a fair share of production overhead cost
Determine the full production cost per unit
A fully absorbed cost is used to value inventory and as a basis for pricing

19. Absorption costing
生产经营费用

20. Absorption costing card$
Direct materials x
Direct labour x
Variable overheads x
Fixed production overheads x
Full production cost per unit x
OAR

21. Absorption costing Overhead allocation Apportioning general overhead
Reapportioning Service costs
Overhead absorption (recovery)

22. Step 1: Allocation A production department
“To assign a whole item of cost, or of revenue, to a single cost unit, centre, account or time period”
A production department
An selling or distribution department
An administrative department
An general overhead cost center
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

23. Step 2: Apportioning general overhead
Overhead that relates to a number of cost centres (i.e. factory rent) will be shared or “apportioned” between those cost centres on an equitable basis.
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

24. Step 2: Apportioning general overhead
Bases of Apportioning
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

25. Step 2: Apportioning general overhead
Example 1:
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

26. Step 2: Apportioning general overhead
Example 1:
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

27. Step 2: Apportioning general overhead
Example 1:
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

28. Step 3: Re-apportion service cost centre overhead
Service cost centre overhead is re-apportioned on the basis of the benefit provided to the production cost centres.
Production Cost Centre 1
Production Cost Centre 2
Service Cost Centre 1
Service Cost Centre 2
Typical service cost centres might be:
Canteen
Stores
Maintenance
Now we have the overhead split between the 4 cost centres, but 2 of them do not directly produce the goods, so we need to re-apportion the service cost centres to the production ones
Problem – again the problem is what basis to use to reapportion the costs – again this will be subjective, or what is available
Example:
Factory canteen – could be reapportioned on the basis of the number of staff in each of the 2 production departments
Maintenance – could use time spent in each department, or number of machines
Canteen costs are $59,500. these are to be apportioned to the 2 production departments on the basis of staff numbers. There are 25 staff in Assembly and 10 in Painting:
Assembly will pick up 25/35 x $59,500 = $42,500
Painting will pick up 10/35 x $59,500 = $17,000
We will then be left with just the costs in the 2 production cost centres
Now try TYU 2.2 (p80) and TYU 3 (a) (p83)

29. Step 3: Re-apportion service cost centre overhead
Now we have the overhead split between the 4 cost centres, but 2 of them do not directly produce the goods, so we need to re-apportion the service cost centres to the production ones
Problem – again the problem is what basis to use to reapportion the costs – again this will be subjective, or what is available
Example:
Factory canteen – could be reapportioned on the basis of the number of staff in each of the 2 production departments
Maintenance – could use time spent in each department, or number of machines
Canteen costs are $59,500. these are to be apportioned to the 2 production departments on the basis of staff numbers. There are 25 staff in Assembly and 10 in Painting:
Assembly will pick up 25/35 x $59,500 = $42,500
Painting will pick up 10/35 x $59,500 = $17,000
We will then be left with just the costs in the 2 production cost centres
Now try TYU 2.2 (p80) and TYU 3 (a) (p83)

30. Step 3: Re-apportion service cost centre
Example 1 (continue):
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

31. Step 4: Absorption into cost units
Fixed production overhead that have been allocated, apportioned and re-apportioned into a production cost centre is then absorbed into cost units using a pre-determined overhead absorption rate (OAR).
Production Cost Centre 1
Production Cost Centre 2
Service Cost Centre 1
Service Cost Centre 2
OAR 1
OAR 2
Fixed Production Cost Centre Overhead
OAR =
Cost Units
QTY of absorption base
Absorption bases commonly used:
It may be worth recapping the steps in slide 26 to remind them where they are in the process
We are now in a position to get the cost to the product (cost unit)
Again this is subjective – how will we absorb the overhead into the product?
Traditionally, we use:
Number of units produced
Labour hours
Machine hours
You have to use the one you feel gives the fairest cost to the product, but there is no right or wrong answer
We first calculate an OVERHEAD ABSORPTION RATE, based on the total overhead divided by the total base we are using (BASED ON BUDGET)
Example:
If the total overheads for Production Cost centre A were $120,000. IF we base the absorption on labour hours (with a budget of 20,000 labour hours)
OAR = 120,000/20,000 = $6 per labour hour
IF Product X uses 3 hours in production department A, then each unit of product X will pick up $6 x 3 = $18.
Note: The OAR is calculated
using the BUDGETED figures
Units produced
Labour hours
Machine hours

32. Step 4: Absorption into cost units
Example 1 (continue):
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

33. Step 4: Absorption into cost units
Example 1 (continue):
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

34. Step 4: Absorption into cost units
During a period overhead is charged or “absorbed” into cost units according to the predetermined OAR multiplied by the number of units produced. Actual overhead incurred is likely to be different to the overhead absorbed leading to an under or over absorption.
(under)/over absorption = overhead absorbed – actual overhead
It may be worth recapping the steps in slide 26 to remind them where they are in the process
We are now in a position to get the cost to the product (cost unit)
Again this is subjective – how will we absorb the overhead into the product?
Traditionally, we use:
Number of units produced
Labour hours
Machine hours
You have to use the one you feel gives the fairest cost to the product, but there is no right or wrong answer
We first calculate an OVERHEAD ABSORPTION RATE, based on the total overhead divided by the total base we are using (BASED ON BUDGET)
Example:
If the total overheads for Production Cost centre A were $120,000. IF we base the absorption on labour hours (with a budget of 20,000 labour hours)
OAR = 120,000/20,000 = $6 per labour hour
IF Product X uses 3 hours in production department A, then each unit of product X will pick up $6 x 3 = $18.

35. Step 4: Absorption into cost units
(under)/over absorption = overhead absorbed – actual overhead
Example
Budgeted Fixed Production overhead = $60,000
Budgeted Production (units) = 1500 units
Therefore budgeted OAR
= 60,000/1500 = $40/unit
During the period actual results were:
Actual Fixed Production overhead = $50,000
Actual units produced = 1200 units
It may be worth recapping the steps in slide 26 to remind them where they are in the process
We are now in a position to get the cost to the product (cost unit)
Again this is subjective – how will we absorb the overhead into the product?
Traditionally, we use:
Number of units produced
Labour hours
Machine hours
You have to use the one you feel gives the fairest cost to the product, but there is no right or wrong answer
We first calculate an OVERHEAD ABSORPTION RATE, based on the total overhead divided by the total base we are using (BASED ON BUDGET)
Example:
If the total overheads for Production Cost centre A were $120,000. IF we base the absorption on labour hours (with a budget of 20,000 labour hours)
OAR = 120,000/20,000 = $6 per labour hour
IF Product X uses 3 hours in production department A, then each unit of product X will pick up $6 x 3 = $18.
Therefore overhead absorbed:- 1200units X $40 = $48,000
Overhead under-absorbed:- $48,000 - $50,000 = ($2000)

36. Step 4: Absorption into cost units
Example 1 (continue):
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

37. Step 4: Absorption into cost units
Example 1 (continue):
Step1 – gather all of the fixed production overhead costs together
Step 2 – need to know all the production and service cost centres:
Example: Production cost centres could be assembly or painting (areas directly involved in producing the product)
Service cost centres could be maintenance or the factory canteen (part of the overall factory cost, but not directly involved in producing the product)
Allocate – this is the easy one where the costs can easily be allocated to one of the cost centres, some cost may only relate to one or two cost centres
Apportionment – this is the difficult one. Stress to students that there is no one right way to do this – it is always subjective. How we apportion the costs can depend on what dta is available:
Examples:
Electricity – if available, can use t he electricity used in each area
Rent – could use floor area
Depreciation of machinery – value of machines
Insurance – value of machines etc
Now try TYU 2.1 (p80)

38. Absorption costing Overhead allocation Apportioning general overhead
Reapportioning Service costs
Overhead absorption (recovery)

39. Proforma of Income Statement
Selling,
admin, distribution cost
Full costs

40. Absorption costing

41. Absorption costing

42. Section 3 Marginal costing
迎评工作 一
Section 3 Marginal costing

43. Marginal cost

44. Marginal Cost $ Direct materials x Direct labour x
Inventories and production are valued at the variable production costs per unit. $
Direct materials x
Direct labour x
Variable production overheads x
Marginal cost X
Contribution is emphasised.

45. Contribution Contribution = Sales Less Variable Costs Direct Materials
Direct Labour
Variable Overheads

46. Marginal costing
1. Only variable costs are charged to the cost of sales
2. Fixed costs are treated as period costs and are
deducted from total contribution to derive profit
3. The valuation of units of output and hence closing
Inventory is therefore at variable production cost

47. Proforma of Income Statement
variable costs
Fixed
costs

48. Marginal costing
Example 2 (p.13)

49. Marginal costing

50. Marginal costing

51. Section 4 Reconciliation of profits
迎评工作 一
Section 4 Reconciliation of profits

52. Reconciliation of profits
The only difference between the two approaches is the value of inventories.
Absorption costing values inventory at a higher value as it includes the fixed production overhead in the standard cost card.
Therefore:
increased inventory increases current period’s profit compared with marginal costing.
decreased inventory decreases current period’s profit compared with marginal costing.

53. Reconciliation of profits

54. Reconciliation of profits
Example 3
- Water Co. make a product, the Splash, which has a variable cost of $5 per unit and a sales price of $10 per unit. There were no inventories at the beginning of Sep. Production during the month was 1,000 units. Fixed cost for the month were $10,000.
Required:
Calculate the profit , contribution using Absorption costing and Marginal costing at each of the following sales levels:
500 splashes (b) 1000 splashes
(c) 1500 splashes
Testing 5 in P27

55. Section 5 Pricing Strategic based on costs
迎评工作 一
Section 5 Pricing Strategic based on costs

56. Pricing using absorption costing

57. Pricing using absorption costing

58. Pricing using absorption costing

59. Pricing using marginal costing

60. Target return on capital
Target return on investment in the product
=Total investment x target rate of return
Example 5

61. Profit margin

62. Profit margin
Example 6

63. 迎评工作 一
Section 6 Summary

64. Summary