Absorption Costing 25% Flashcards
What is Cost allocation
This is the process by which items are charged directly to a cost unit or cost centre
Indirect Costs
- Clearly identifiable with cost Centre’s Overheads are allocated to those cost centre’s
What are the two steps of overhead apportionment
- Identify all overheads as production, service, administration or selling and distribution overheads.
- Apportion the costs of service cost centers ( both directly allocated and apportioned costs ) to production costs
What is the direct method of reapportionment
This does not take into account the fact that different service departments do work for each other
What is repeated distribution method
Takes into account the fact that service departments do work for each other
What are the three bases of absorption ?
- unit
- direct labour hour
- machine hour
What is the formula for overhead absorption rate ?
OAR budgeted = Budgeted ( or estimated ) overheads
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Budgeted Activity level ( hours, units)
Why do over/under absorbed overheads occur?
They arise because of the OAR is predetermined from budget estimates.
When actual overheads incurred and overheads absorbed using predetermined OAR’S differ, there will be an over or under absorption of overheads
What the reasons for over or under absorption ?
- Actual overheads don’t equal budgeted overheads
- Actual activity level doesn’t equal budgeted activity level
- the two above together
ABC System
- identify an organisations major activity
- identify cost drivers ( any factors which courses a change in the cost of an activity ) for each activity
- collect the costs associated with each activity into cost pools
- charge support overheads to products on the basis of their usage of the activity ( measured by the number of the activity’s cost driver they generate )
Absorption costing cost card
- aims to include some fixed costs into the cost per unit
- direct labour
- direct material
- variable overheads
Overheads ( fixed )
= full cost per unit
