You have been asked by the Managing Director of Movie Ltd. to prepare a report for the next meeting of the Board of Directors.
Your report should address the following issues:
a) An explanation and critical assessment of Absorption Costing and Activity Based Costing in applying overheads to products/services. 20 Marks
b) The nature and purpose of standard costing and variance analysis and the questions it may assist in answering for Movie Ltd. You should include worked examples to illustrate your analysis. 20 Marks
c) In light of the ongoing situation of “Brexit” outline what actions an exporting company based here in the Republic of Ireland may take to protect itself and its export market. 15 Marks
d) An explanation of the FRS 1 Cash flow statement and why is useful to a business. 20 Marks
Activity-based costing, also known as ABC, is an accounting method that identifies a company’s activities and assigns costs to units produced by the company based on the number of activities used by each unit.
Activity-based costing first determines the purpose and cost of each activity performed by a company and then assigns a proportionate cost to every individual unit produced based on its consumption of those activities.
Let’s say a company spends $20,000 per year on equipment setup. Under activity-based costing, it would then attempt to assign a proportion of that $20,000 to each unit it produces.
However, doing so is not just a simple matter of taking that $20,000 and dividing it by the number of units produced. Instead, the company would need to figure out which units or products utilize which equipment the most, and then assign each unit a cost based on its individual consumption of that usage.