Absorption Costing (job costing and process costing) Cost Allocation

Question 1

Absorption costing stages (3)

Answer 1

Allocation::

• Whole cost items are charged directly to a cost center or cost unit.

Apportionment::

• Indirect costs are spread fairly between cost centers, and service center costs are apportioned to production cost centers.

Absorption:

• Overhead costs allocated and apportioned to production cost centers are added to unit, job, or batch costs.

Question 2

Choosing the appropriate absorption base

8 examples

Answer 2

• % of direct materials cost
• % of direct labour cost
• % of prime cost
• Rate per machine hour
• Rate per direct labour hour
• Rate per unit
• % of factory cost (for administration overhead)
• % of sales or factory cost (for selling & distribution overhead)

Question 3

Over and under absorption of overheads

Why does it occur?
Effect of both?

Answer 3

…occurs because the predetermined overhead absorption rates are based on estimates (i.e. estimated overhead / budgeted activity)

Over absorption

• overheads charged to COS > actual overheads (too much!)

Under absorption

• overheads charged to COS < actual overheads (too little!)