Absorption Costing

Question 1

Cal OAR

Answer 1

Budgeted production activity level

Question 2

OAR

Answer 2

Overhead absorption rate

  Bud. production overhead    =    -----------------------
         Bud. Activity lvl

Question 3

Amount absorbed

Answer 3

= actual prod. Activity * OAR

Question 4

ABC

Answer 4

An alternative approach to absorption costing using cost drivers to assign activity costs to units

Question 5

Cost driver

Answer 5

Factor influencing the lvl of cost

Question 6

OAR

Answer 6

The rate at which overheads are charged to cost units cal by dividing budgeted overheads by the budgeted lvl of activity

Question 7

Over/under- absorption

Answer 7

More overheads are absorbed into production than have actually been incurred - expense so

Fewer overheads are absorbed into procuring than have actually been incurred - (expense) so

Cal on actual vs absorbed costs

Question 8

Absorption costing -ve and +ve

Answer 8

+ve

• complies with IAS2 (inventory valuation)
• fixed costs taken to account for LR unlike marginal costing
• production cannot be divorced from fixed costs since without them no production
• ve
• unit cost includes costs not relevant for marginal decision making
• nature of cost is obscured
• method is somewhat arbitrary

Question 9

Accounting for overhead absorption?

Answer 9

Overhead is production cost :. Dr to WIP control account (with direct labour, materials and expenses)
Cr is production overhead account (will have Dr with the actual overhead incurred)

Any balance on production overhead account is transferred to the SPL as under/over-absorbed overhead

Question 10

ABC steps

Answer 10

1 identify orgs major activities
2 identify the cost drivers
3 collect the costs associated with
each activity into cost pools
4 charge the costs of activities to products
based on usage of activity. Measured by the
number of the activities cost driver is
generates.