4. Absorption Costing Flashcards
What is absorption costing?
A product costing/ inventory valuation method which includes ALL production costs
What are the steps for absorption costing?
- Allocate direct costs to cost units
- Allocate and apportion production overheads to cost centres
- Reapportion overheads in service cost centres to production cost centres
- Absorb overheads into cost units
What is allocation?
When whole cost items are charged to a cost centre.
What is apportionment?
When cost items are divided between different cost centres
What is reapportionment?
The process of transferring all service cost center overheads to the production cost overheads
What is OAR?
Overhead Absorption Rate, is the production overhead/activity level.
What is a blanket absorption rate?
An absorption rate used throughout a factory and units of output irrespective of the department in which they were produced.
What is the predetermined OAR?
It is the budgeted overhead/ budgeted activity level.
What is the formula for overhead absorbed?
Actual activity x predetermined OAR.
What is the formula for under/over absorption?
Actual overhead less overhead absorbed.
Define under and over absorption.
Under absorption: If overheads absorbed are less than actual overheads.
Over absorption: If overheads absorbed are greater than actual overheads.
