Absorption Costing Flashcards
What does absorption costing attempt to calculate?
A FC per unit and therefore a total cost per unit
What overheads are we absorbing through absorption costing?
Production overheads
What is absorption costing also known as?
Full or total costing
What is absorption costing used for?
Price setting
Inventory valuation
Which costing method should be used for inventory valuation?
Absorption
IAS 2 “inventories” says that production overheads should form some part of inventory value
What is the general formula for calculating OAR?
Budgeted overheads / budgeted activity level
What is significant about the values used to calculate OARs?
They are budgeted values
What is allocation?
Directly attributing an overhead to a cost centre that is solely responsible for that overhead
What is apportionment?
Sharing overheads between cost centres that cannot be attributed to one particular cost centre
What is re-apportionment?
Re-sharing overheads of service cost centres amongst the production cost centres
Why do we reapportion overheads from service cost centres to production cost centres?
Products do not pass through the service cost centres and therefore cannot absorb the overheads there
What is over-absorption of overheads? How is this treated in the financial statements?
More overheads are absorbed than actually incurred. Add back in P&L section
What is under-absorption of overheads? How is this treated in the financial statements?
Fewer overheads are absorbed than actually incurred. Subtract in P&L section.
How do you calculate the overheads actually absorbed?
Actual activity level x predetermined OAR
When does over/under absorption of overheads occur?
When actual overheads or activity differ from budgeted overheads or activity
