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CIMA Official Learning System - Performance Operations
Finance & Accounting
Pages 6 (1506 words)
Running Head: Management Accounting Management Accounting [The name of the writer will appear here] [The name of the institution will appear here] [The name of the Professor] [Course] Question 1 Total Cost Approach In the Total or Full Cost Approach, the firm calculates all the costs that are to be incurred by the company and adds a profit margin to it.
Indirect costs refer to costs that are not directly associated with the product and do not apparently increase the cost of the product. Indirect costs include overhead costs that are incurred by the organization to keep the organization running and are usually incurred under joint usage of more than one product. Examples of indirect cost include electricity, utility and telephone bills. Since all organization produce more than one product and the overhead costs are incurred together and thus the allocation, appropriation and absorption of these overhead costs have to be done most justly. Allocation allocates the overhead costs to the cost centres or units from where these costs are incurred. Appropriation is done on two levels. On the primary level, appropriation is done by dividing overhead costs to both product and service centres on an equal basis. On the secondary level, overhead costs are distributed on arbitrary bases, depending upon either time or usage. Absorption is the absorption of overhead costs to the production cost. To do this, absorption rate is determined using the following formula: Overhead Recovery Rate = Overhead Costs/ Unit Chose (Drury, 2007) The advantage of full cost approach is that it is relatively simple to use this approach if the firm can account for its costs easily. ...
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