Absorbtion & Marginal Costing

Question 0

1. Overhead absorption rate (oar)

2. Over/under absorption

Answer 0

1. Overhead Absorption Rate (OAR) = estimated overhead / budgeted activity level (total units produced)
2. = (budgeted overhead rate per unit x actual units) - actual overhead incurred

Question 1

Absorption costing vs Marginal costing

Answer 1

1. Sharing overheads between a number of different products or services on a fair basis
   Includes allocation, apportionment & absorption
   • comparing sales price and absorption cost = PROFIT per unit
   • profit = contribution - fixed costs
2. Only variables are charged as a cost of sale and contribution (profit) is calculated
   • does not account for fixed costs so fixed costs must be subtracted as a separate figure
   • comparing the sales price and marginal cost = CONTRIBUTION
   • contribution = sales price - marginal cost

Question 2

Total absorption costs

Answer 2

Total marginal cost - fixed cost @ absorption rate