absorption costing

Question 1

what is absorption costing?

Answer 1

a traditional costing
approach where direct costs are
attributable to cost objects AND indirect
costs (overheads) are allocated to cost
objects on the basis of volume-based cost
drivers such as direct labour hours or
machine hours.

Question 2

absorption costing

what are drivers?

Answer 2

Drivers are factors that cause changes in
the use of resources.

Question 3

Absorbing overheads

 ‘Absorption of overheads’ is the term used

Answer 3

for the process of apportioning indirect (overhead)
costs to products

charge each cost unit with a share of the costs of running the factory (e. rent, lighting, heating, cleaning)

Question 4

absorbing overheads

what is the objective?

Answer 4

is to share indirect costs between
products equitably

Question 5

what is the absorption rate/ overhead recovery rate

Answer 5

rate at which cost objects (eg. jobs) will be charged with overheads (eg. direct labour hour)

total overheads/level of
activity

eg. 30000/ 15hours = 180

Question 6

absorbing overheads

what are common activity measures?

Answer 6

 direct labour hours
 direct labour costs
 machine hours
 cost of materials

Question 7

absorbing overheads

what must it take into account?

Answer 7

the amount of indirect costs
used to supportthe manufacture of products

Question 8

Absorbing overheads
This must take into account the amount of indirect costs used to support the manufacture of products

what are 3 stages in the process?

Answer 8

1 identify and collect overhead costs associated with
both the production and service cost centres,

2 charge these costs to the production cost centres via some method of apportionment, and
3 absorb overhead costs into products

Question 9

 It may be useful to allocate indirect costs to a product or
service. But remember:

Answer 9

 any allocation is arbitrary
 the are many ways that indirect costs can be
allocated

Question 10

selecting a basis for charging overheads depends on

Answer 10

nature of overheads

eg. in capital intensive where overheads are dominated by those relating to machinery (eg. depreciation, machine maintenance, power), machine hours might be favoured

otehrwise, direct labour hours might be preferred basis of charging overheads to jobs

Question 11

deducing full costs is often done

why?

Answer 11

in advance. costs are frequently predicted.

full costs may be used a a basis to set prices in which price has to be set before the customer agrees to the job being done