Absorption Costing Flashcards
What is Absorption Costing?
A method of calculating the cost of making a product by including indirect expenses (overheads) along with direct costs.
Also known as ‘full’ costing.
What are the components of Absorption Costing?
- Period costs
- Direct materials
- Direct labour
- Direct expenses
- Indirect expenses
- Prime cost
- Production cost
- Total cost
What is the purpose of allocating costs to individual units?
- Profit measurement
- Stock valuation
- Decision making
- Planning
- Control
What are some examples of overheads in a manufacturing environment?
- Depreciation of equipment and factory facilities
- Rent
- Property rates
- Insurance
- Utilities
- Employment costs for supervisors
- Canteen costs
True or False: Absorption costing is only concerned with direct costs.
False
Absorption costing includes both direct and indirect costs.
What is the formula for calculating a blanket overhead rate?
Total overheads divided by Total base units (usually units or hours)
This rate is applied uniformly across products.
Fill in the blank: The _______ is an example of a first stage basis of apportionment.
[area]
Other bases include number of employees, book value, and number of requisitions.
Why is absorption costing useful for financial accounting?
It is compliant with IAS 2, which requires the value of stock to be shown on the Statement of Financial Position at the lower of cost and NRV.
What are the criticisms of absorption costing?
- Simple
- Inaccurate
- Fixed cost behavior
- Limited value of information
What is a prime cost?
The total of direct costs associated with manufacturing a product, including direct materials, direct labor, and direct expenses.
What is the role of overhead analysis in absorption costing?
To categorize and allocate overhead costs to production departments and ultimately to products.
What is the significance of recovery rates in absorption costing?
They are used to charge overheads to products based on the allocated costs from cost centers.
Fill in the blank: The _______ is a financial measure used to evaluate the performance of production departments.
[budget]
Managers are evaluated based on how well they perform against budgeted costs.
