2) Traditional costing

Question 1

Over/(under) absorption of fixed overheads - Calculate

Answer 1

= Overheads absorbed - Actual overheads

*Overheads absorbed = budgeted OAR x Actual level of activity

Question 2

Overhead Absorption Rate (OAR) - Calculate

Answer 2

= Total budgeted fixed overheads / Budgeted quantity of absorption base

Absorption base is usually: labour hrs, machine hrs, or units

Question 3

Reconcile absorption vs. marginal costing profit when inventory levels change

Answer 3

Absorption costing profit + (-) Decrease (or increase) in inventory units x Fixed overhead per unit = Marginal costing profit