Absorption Costing (job costing and process costing) Cost Allocation Flashcards
Absorption costing stages (3)
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.
Choosing the appropriate absorption base
8 examples
- % 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)
Over and under absorption of overheads
Why does it occur?
Effect of both?
…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!)
Tracing cost of products A, B and C in a single cost centre
What are the 2 steps
Step 1: Direct tracing of tracing costs
Step 2: Sharing of indirect costs (overhead) by apportionment to products
Traditional approach to indirect costs
What are 3 steps?
Identify overhead costs and identify cost centres that accumulate costs
Step 1: Allocate indirect costs to cost centres
Production overheads
Indirect material plus indirect labour plus other indirect costs
Step 2: Apportion service cost centre to production cost centres
- Production cost centre: Assembly
- Service cost centre: Maintenance
- Production cost centre: Finishing
Step 3: Absorb overhead costs into product
Product S = 2 hours Assembly + 3 hours Finishing
Absorption costing stages (3 with small description)
Allocation:
- whole cost items are charged direct to a cost centre or cost unit
Apportionment:
- indirect costs are spread fairly between cost centres
- and service centre costs are apportioned to production cost centres
Absorption:
- overhead costs allocated and apportioned to production cost centres are added to unit, job or batch costs
Overhead apportionment
What is apportionment?
What are the possible bases of apportionment for the overheads in the picture)?
Stage 1
Apportionment
- indirect costs are spread fairly between cost centres and service centre costs are apportioned to production cost centres
Overhead apportionment - Example question
Overhead apportionment
Stage 2: apportioning service department costs
What are the 3 types of method?
Possible basis of apportionment for the picture
Stage 2
Direct method:
- service centre costs → production departments
Step-down method:
- service centre costs → production departments & some service centres
Repeated distribution (or reciprocal) method:
- service centre costs → production departments & service centres → production departments
Answer questions at the bottom
Also do total overheads for each production department
Stag
Use repeated distribution (reciprocal) apportionment
Apportioning service department overheads
Answer the question at the bottom
Overhead absorption
What is absorption?
Calculation of overhead absorption rates (4 steps)
Absorption:
Overhead costs allocated and apportioned to production cost centres are added to unit, job or batch costs
Allocate → Apportion → Absorb into cost units
Calculation of overhead absorption rates
Step 1: estimate overhead for the coming period
Step 2: estimate activity for the period (e.g. total hours/units)
Step 3: Overhead absorption rate = Estimated overhead / Budgeted activity
Step 4: Use overhead absorption rate to absorb overheads into cost units
Choosing the appropriate absorption base (8 examples)
- % 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)
The cost allocation for supervisory salaries is just the costs for each department placed in the appropriate cell in the table. The rent, rates and insurance cost is apportioned to the departments based on the floor area so 50% of £100 000 = £50 000 is charged to the machine shop and each of assembly and general work departments get charged £100 000 × 25% = £25 000. The power is charged based on the number of machines in each department.
The first thing to do is calculate the total number of machines within the three departments as 6+3+6 = 15. Now the machine shop and general work will be charged 6/15 × £80 000 = £32 000.
Assembly will be charged based on 3/15 × £80 000 = £16 000. It is always worth checking that the full cost has been charged by adding the cost charged to all three departments and making sure that this equals the overall cost given in the question.
The final part of this question is to work out the absorption rate that will be charged to the products. There is only one criterion that is available and that is the planned labour hours, as the other available bases are not appropriate.
