What is the difference between a cost unit and a cost centre

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Reference no: EM131627857

MODULE TITLE: BUSINESS MANAGEMENT TECHNIQUES

TOPIC TITLE: COSTING TECHNIQUES

LESSON 1: ABSORPTION COSTING

INTRODUCTION - In this lesson we first provide a background to cost accounting including the reasons why it is required and how costs are classified. We then examine the absorption costing technique and the way in which it is used to deal with business overheads.

YOUR AIMS - At the end of this lesson you should be able to:

appreciate the need for cost accounting
classify costs by set categories
appreciate different methods of costing
understand what is meant by absorption costing
allocate overheads to cost units by applying standard principles
calculate overhead recovery rates for products/jobs
appreciate the role of overhead recovery in budgeting.

Questions -

1. What is the difference between a cost unit and a cost centre?

2. State which method of costing (i.e. job, contract or process costing) may be appropriate for the following products:

(i) mass produced microwave oven

(ii) domestic dwelling building extension

(iii) a chemical plant shutdown.

3. What is absorption costing?

4. Crundy Ltd manufacture domestic appliances. You are given the following information relating to one month's normal production:

Appliance	Quantity Produced	Total Production Time (Hours)
Washers	40	150
Dryers	50	125
Cookers	25	75
Fridges	75	150
	190	500

If the total overheads in the month are £16 000, what is the overhead cost for a single unit of each appliance?

5. Tabihat Ltd has three production cost centres. Its production overhead costs for the year were as follows:

	£
Rent/Rates	200,000
Lighting	10,000
Heating	50,000
Building Repairs	5,000
Power	250,000

	£
Depreciation of Machines	10,000
Machine Repairs	15,000
Stores	17,500
Foreman's Salary	12,000
Canteen	27,500
	82,000

Basic data for the same period is:

	Sawing	Assembly	Painting	Totals
Employees (No.)	30	90	60	180
Floor Area (m²)	45,000	6,000	3,500	14,000
Asset Value (Machines)	£200,000	£50,000	£10,000	£260,000
Materials Requisitions	15,000	3,000	2,000	20,000
Kilowatt Hours	100,000	25,000	5,000	130,000

Using the above information, prepare a cost allocation statement for the period, allocating the cost over the three centres and stating the basis of your allocation.

Reference no: EM131627857

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