Page 57 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Period 3: During this period, profit under Absorption costing is less than that of Marginal
costing by ` 32000. This is due to the fact that by 8000 units opening stock is more than that of
closing stock. As a result, to the cost of production of current year, a portion of last year's fixed
overhead is being charged.
Period 4: During this period, profit under Absorption costing is less than that of Marginal
costing by ` 16000. This is due to the fact that to the cost of production of current years, the fixed
overhead relating to opening stock is being charged.



Caselet Costing

T he costing of all services delivered by NHS providers should be governed by the
following principles:

Costs (and income) should be:
(a) calculated on a full absorption basis to identify the full cost of services delivered;
(b) allocated and apportioned accurately by maximizing direct charging and where this
is not possible using standard methods of apportionment; and
(c) matched to the services that generate them to avoid cross subsidization. The costing
process should also be transparent with a clear audit trail.
Where costs have not been directly attributed to the patient, costing pools should be
constructed so that the costs included can be allocated or apportioned using the same
method. Costing pools can be constructed in different ways dependent on the nature of the
costs included in them. The manual gives examples. One absorption rate is calculated by
dividing the combined fixed and semi-fixed costing pools forwards, theatres and outpatients
by the appropriate activity units i.e. bed-days, theatre-hours or attendances.
Discussion Points
1. What problems might be faced in apportioning overhead costs?
2. Why might it be important that the costing process should be transparent with a
clear audit trail?
Source: Department of Health, NHS Costing Manual 2008/09, http://www.dh.gov.uk/en/
Publicationsandstatistics/Publications/Publications Policy And Guidance/DH_095890.

Self Assessment

Fill in the blanks:
8. …………………… costing is a method by which all direct cost and applicable overheads
are charged to products or cost centres for finding out the total cost of production.

9. Fixed costs should not be absorbed in the cost of …………………… but should be charged
to the Costing Profit and Loss Account.
10. Under absorption costing all …………………… costs i.e. overheads are first apportioned
and then absorbed in the production units.
11. Cost control aims at not allowing the cost to …………………… beyond the present level.
12. Marginal costs are …………………… costs consisting of labour and material costs, plus an
estimated portion of fixed costs (such as administration overheads and selling expenses).

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